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Monday, November 25, 2019
/03:35 PM / By Tobias Adrian and Ashraf Khan, IMFBlog / Header
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In August 1694, the Bank of England opened for business with a staff of 19. The original Royal Charter, granted by King William and Queen Mary, tasked the Bank to "promote the public Good and Benefit of our People". As a private company, its independence from the government was not then contemplated. Though it would eventually come-some 300 years later-when, in May 1997, the British government gave the Bank operational independence over monetary policy, to take effect a year later.
In the grand scheme, central bank independence is relatively new-the
idea gained steam in the 1970s-but has proven a valuable, stabilizing force for
countries seeking politics-free monetary policy decisions. But a decade after
central bankers became pivotal actors in the global financial crisis, central
banks around the world are striving to fulfill their mandates under difficult
circumstances. From Europe to the Americas, from Africa to Asia, restive voters
and their governments demand greater accountability and some now question central
banks' once-sacrosanct independence.
Legal basis
Numerous studies have validated the importance of central banks' independence. Indeed, research based on the IMF's database of
central bank legislation shows that most nations' central bank laws contain "anchors," in one form or another, for central bank independence.
Generally, the laws tend to recognize that if politicians manipulate
monetary policy to bolster their pre-election popularity, their prioritization
of short-term political gains could invite long-term pain for the economy, in
the form of higher inflation or even hyper-inflation. This political
interference could undermine central banks' goals-such as stable inflation over
time and, in some countries, maximum employment-and potentially create
long-term risks to economic and financial stability.
Former Federal Reserve Chair Janet Yellen cautioned that "sometimes
central banks need to do things that are not immediately popular for the health
of the economy. We've really seen terrible economic outcomes in countries where
central banks have been subject to political pressure".
The Struggle of Central Banks
Since the global financial crisis, many central banks pursued strategies
that led to significant expansions of their balance sheets. In some cases,
governments tasked them with new or additional financial stability functions on
top of their mandate of price stability. In some quarters, concerns about the
expanded activities of central banks led to skepticism about the necessity or the
appropriate degree of central bank independence.
Indeed, the overall direction and composition of IMF work with country
monetary authorities confirms the struggle. In one-fourth of IMF staff visits
to provide technical assistance to central bank staff, the discussions include
issues related to central bank independence, in one form or another.
And most of that attention has been focused on strengthening their
independence in the context of ensuring effective monetary policy and
modernizing their operations. This underscores the clear priority that central
banks worldwide now place on protecting against threats to their independence.
Independence and Accountability: Two
Sides of the Same Coin
The continuing discussions about central bank independence, in light of
post-crisis realities, highlight the fact that central banks do not and should
not operate in a vacuum. As public institutions, central banks should be held
properly accountable to lawmakers and to society.
Transparency is a key element of this social accountability. Examples of
appropriate transparency include the publication of minutes of meetings,
responsiveness to lawmakers' inquiries, the publication of detailed technical
reports, meetings with Ministers of Finance, and convening press conferences.
The graphic below highlights the important connections among the key
concepts that make up central bank governance. Bridging independence and
accountability is the notion of transparency, a vital component allowing
independent central banks to prove their effectiveness and public
accountability. Or, in the words of South African Reserve Bank Governor, and
Chair of the International Monetary and Financial Committee (the Fund's policy
steering committee) Lesetja Kganyago: "For society to appreciate our roles, we…
have got to take society along with us, such that when central banks come under
attack, it is not just going to be us defending our independence".
Earlier this year, the IMF proposed a new Central Bank Transparency
Code. The Code is expected to facilitate greater transparency of central banks
on their governance arrangements, policies, operations, outcomes of operations,
and interaction with key stakeholders. This should help central banks adapt to
their changed environment, as well as provide a continued raison-d'etre for
their independence. The proposal makes clear that modern central banks are
expected to explain and justify their actions and give account of the decisions
made in the execution of their responsibilities.
Independence and accountability are also needed to ensure good governance and the prevention of
institutional decay over the long term. Poor governance and corruption not only
harm the economy through short-term disruption, but also take an insidious toll
on institutions, weakening their effectiveness. Central banks are not
immune.
Guarding Independence
Independence surely remains a key principle in ensuring the sound
operation of central banks-in particular, from the perspective of their
price-stability objective. However, central banks will need to step up their
game. Transparency about their multifaceted decisions and actions needs to be
strengthened, and clear communication with the public is paramount.
Only by simultaneously enhancing central banks' governance,
transparency, and accountability can their long-term independence be assured.
This is the surest step to help rebuild public confidence in central banks as
reliable defenders of non-inflationary, job-creating economic policies.
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