Wednesday, June 12, 2019
Central Bank Accountability, Independence, and Transparency
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.
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.”
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.