Central Bank Governance An Examination of Nine Central Banks of Developed Economies

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Central Bank GovernanceAn Examination of Nine
Central Banks of Developed Economies
A/PROF. CANER BAKIR KOC UNIVERSITY INTERNATIONAL
RELATIONS DEPARTMENT
2
Overview

• Aims and motivation
• Sample of central banks
• Independence and Transparency measures
• Results
• Conclusions

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Aims and motivation

• During the 1990s, central bank independence (CBI)
  formed the cornerstone of institutional reforms
  insulating monetary policy from political
  influences
• CBI restricts the avenues for political
  interference in monetary policy decision making
  (see Woolley (1984) Goodman (1992))

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Aims and motivation

• The independence of an unelected central bank
  governor vis a vis democratically-elected
  government may create a loss of democratic
  accountability or a democratic deficit
• Importantly, there has been limited reference to
  complementing increased CBI with greater central
  bank transparency

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Aims and motivation

• The main objective of this study is to examine
  whether central banks of developed economies with
  high levels of independence are also highly
  transparent to counteract the democratic
  deficit due to independence
• Also, this study contains the most recent CBI
  rankings for the nine central banks selected. A
  comparative analysis of CBI across time is
  conducted. The previous independence rankings
  prior to reforms are compared to our updated
  independence rankings

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Sample of central banks

• European Central Bank (ECB)
• Reserve Bank of Australia (RBA)
• Bank of Canada (BOC)
• US Federal Reserve System (Fed)
• National Bank of Switzerland (NBS)
• Riskbank of Sweden (RBS)
• Bank of England (BOE)
• Bank of Japan (BOJ)
• Reserve Bank of New Zealand (RBNZ)

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Independence and Transparency measures

• To assess the level of current statutory CBI, the
  measure of Elgie (1998) was used and the most
  recent CBI index was calculated for the sample of
  central banks
• The indicators of CBI were classified with
  reference to political and economic independence

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Results Central Bank Independence
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Independence and Transparency measures

• Disclosure plays a pivotal role in the public
  understanding of monetary policy and hence the
  transparency of a central bank (see de Haan
  Amtenbrink, 2000 Winkler, 2000 Siklos, 2002)
• Following Eijffinger and Geraats, transparency
  is defined as the extent to which central banks
  disclose information that is related to the
  policy making process (2003, p.2, emphasis
  added)

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Independence and Transparency measures

• The transparency measure and data presented in
  Eijffinger and Geraats (2003) was used to compare
  the overall independence and transparency of the
  central banks
• The index comprises the political, economic,
  procedural, policy and operational aspects of
  central banking

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Results Central Bank Independence and
Transparency
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Independence and Transparency measures

• For the comparative analysis of CBI over time,
  the Cukierman (1992) (C) measure, the Grilli,
  Masciandaro, and Tabellini (1991) (GMT) measure,
  and the Alesina and Summers (1993) (AS) measure
  were used to compare the CBI ranking within our
  sample before and after the period of legislative
  reform

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Results CBI rankings prior and following
legislative reform period
CURRENT ranking as per Elgie (1998) Prior ranking as per C(1992) Prior ranking as per AS (1993) Prior ranking as per GMT(1991)
RBS NBS NBS NBS
NBS FED FED FED
RBNZ BOC BOC BOC
FED RBA BOJ RBA
BOC BOE RBA RBS
RBA RBS BOE BOE
BOE RBNZ RBS BOJ
BOJ BOJ RBNZ RBNZ
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Results Central Bank Independence and
Transparency

• Correlation coefficient between independence and
  transparency is not statistically significant
• It has been found that highly independent central
  banks are not necessarily highly transparent

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Conclusions

• It is evident that highly independent central
  banks are not necessarily highly transparent the
  democratic deficit associated with highly
  independent central banks is not counteracted by
  high levels of transparency
• Following legislative reforms, some central banks
  have improved their CBI ranking within the sample
  (RBS and RBNZ) while others maintained an
  unchanged or low ranking (BOJ and BOE)

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Conclusions

• This paper highlights the need for future central
  bank reforms to explicitly attempt to increase
  central bank transparency when implementing
  increased independence reforms and to assess
  legislative reforms on the basis of improved
  transparency in conjunction with independence
  measures

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THE GOVERNANCE OF THE EUROPEAN CENTRAL BANK
(ECB) A CLOSER LOOK

• A/PROF. CANER BAKIR
• KOC UNIVERSITY
• INTERNATIONAL RELATIONS DEPARTMENT

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In a democratic society, elected politicians
should decide on the explicit definition and
ranking of objectives of monetary policy.

• It is questionable whether it is legitimate in a
  democratic system to leave the decisions on the
  objectives of monetary policy in the hands of an
  independent institution that is not subject to
  elections or ministerial responsibility.

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Instrument Independence

• A CB is the final authority on monetary policy
  decisions.(not subject to the veto of the
  executive or legislative branches of government,
  further the Treasury Department or the Ministry
  of Finance are not represented on the monetary
  policy committee) Example ECB
• A lesser protection would be to allow such
  representation, but only in a non-voting
  capacity, as is the practice at the Bank of
  England and the Bank of Japan.

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First source of accountability is related to the
two aspects of designing the objectives for
monetary policy

• First, a single objective (typically price
  stability)- or even a hierarchical mandate- makes
  the CB more accountable
• Second, explicit numerical targets make a CB more
  accountable than more general targets.

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Furthermore, these objectives should be clearly
defined.

• Unfortunately, the primary objective of the ECB
  as described in primary Community law i.e. to
  maintain price stability- is not precisely
  specified. In the current setting, it is left to
  the ECB to provide an operational expression of
  its primary objective.

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The choice of a single objective simplifies the
monitoring of CB performance.

• The announcement of a single goal (or a primary
  goal), rather than several unranked goals,
  enables authorities and public opinion to control
  performance more effectively. In this sense, the
  ECB Statue is very clear it provides for a
  hierarchy of goals.

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The Federal Reserve System faces multiple
objectives that may be conflicting.(maximum
employment, stable prices and moderate
long-interest rates)

• Neither the Federal Reserve Act, nor any other
  law, provides for any hierarchy. A good example
  of clear prescription of objectives is the
  Reserve Bank of New Zealand, which has as its
  primary objective the pursuit of price stability.

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• -Many recent examples exist of CBs being given
  tighter mandates at the same time they were given
  formal instrument independence.
• -The tight mandate leaves the most important
  decision- that of the goals of policy- in the
  political process, and it also facilitates the
  accountability of the newly independent CB.
• This is the case for both the Bank of England
  and the Bank of Japan.

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Second source of accountability is through the
reappointment of committee members.

• If terms are short and, especially if the
  chairman and the other voting members can be
  reappointed for additional terms, more control
  can be exercised throught the reappointment
  process, and committee members can more easily be
  held accountable for their policy votes.
• ECB committee members cannot be reappointed.

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• Note This is a clear example of the trade-off
  between independence (facilitated by long terms
  without the possibility of reappointment) and
  accountability. (facilitated by short terms with
  opportunities for reappointment)

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Also, the dismissal procedure for a central
banker can account to a mechanism of ex post
accountability if a CB official can be dismissed
on grounds of bad performance that is not
realizing stated objectives.

• Dismissal may function as a sanction for poor
  performance by linking the tenure of CB officials
  to policy results, i.e. meeting the predetermined
  monetary policy target. This is the case for the
  Reserve Bank of New Zealand where the Policy
  Target Agreement between the governer of the Bank
  and the Minister of Finance lays down the policy
  targets which the former has to achieve.
  Inadequate performance can result in the
  dismissal of the governer. In contrast, the
  president of the ECB can only be dismissed if he
  no longer fulfills the general conditions
  required for his performance or in case of
  serious misconduct.

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A third source of accountability is oversight
hearings on monetary policy held by legislative
committees.

• Parliament always holds the ultimate
  responsibility for monetary policy since it can
  change the legal basis of the CB.
• Indeed, the mere threat of a change of the law
  may ensure that even independent central banks
  (like the Bundesbank) will ensure that the
  monetary policy will, in general, be in
  accordance with the wishes of elected
  politicians. This holds true in the European case
  only for national parliaments.

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How does the ECB score?

• The ECB participates in oversight hearings by the
  European Parliament, but that body has no
  authority over the bank. This makes the ECB,
  without question, the CB with the greatest degree
  of instrument independence and the least degree
  of political accountability.

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Apart from the obligatory yearly presentation of
an annual report of the activities of the ECB by
the president of the ECB, the European Parliament
can ask the members of the Executive Board to
appear in Parliament.

• The ECB has gone some way again as president
  Duisenberg has expressed his willingness to
  appear before the European Parliament at least
  four times a year, apart from the presentation of
  the Annual Report.

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Fourth source of accountability is
transparency-increased transparency may
compensate for the loss of democratic
accountability arising from independence

• The legal basis of the ECB foresees the
  publication of reports on the activities of the
  ECB on at least a quarterly basis. Whether, and
  to what extent, they will include details on the
  past performance and projections on the future
  development of monetary policy is again left to
  the ECB to decide. The Maastricht Treaty and ECB
  Statue do not include any details on the contents
  of these reports. In its attempts, ECB has
  decided to publish a Monthly Bulletin. By
  publishing its reports more frequently than
  required, the ECB shows that it takes complaints
  about accountability and transparency quite
  seriously.

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CONCLUSION

• The European Union has the most
  legally-independent central bank (0.73). However,
  the ECB has the average score for transparency
  (10.7) among the nine central banks.
• It is evident that highly independent ECB is not
  highly transparent pointing to a democratic
  deficit problem in the monetary governance of
  the EU .