Are Contemporary Central Banks Transparent about Economic Models and Objectives and What Difference Does It Make? / Commentary
Cukierman, Alex, Walsh, Carl E., Review - Federal Reserve Bank of St. Louis
Authority over monetary policy has increasingly been delegated to central banks with substantially higher levels of independence than in the past. This worldwide trend has propelled the twin issues of accountability and transparecny to the forefront of the debate on monetary institutions. The current debate is particulary intense on the European side of the Atlantic where the formation of European Central Bank (ECB) facing 12 different fiscal authorities and different types of labor markets has transformed those previously mainly acedemic questions into practical policy issues.
There is nowadays a good deal of consensus about the objectives and desirable organization of monetary policymaking institutions. In particular, there is widespread consensus that the main objective of monetary policy should be price stability, that the central bank (CB) should have the freedom to set the interest rate without political interference, and that the objectives and the procedures followed by the CB should be reasonably transparent. The insistence on transparency is motivated by the desire to ultimately make the CB accountable to the general public either directly or through the intermediation of elected officials. But once those general principles are translated into operational guidelines, some differences appear. The consensus about transparency is most fragile to the introduction of practical guidelines, as illustrated by a recent interchange between Buiter (1999) and Issing (1999). Buiter's position largely reflects what I have called elsewhere the (new) Bank of England (BE) approach, and Issing's position reflects the approach of the ECB, which has been largely shaped by the philosophy of the Bundesbank (BB) during the last several decades.1
Both approaches agree on the principle that a CB should be transparent and accountable but differ on the means to achieve those goals. The most vocal disagreements have been about the early publication of CB forecasts and the voting record of individual monetary policy council members. The BE approach is in favor of early release of this information, while the BB approach is against it. Those differences partly reflect the BB view that there should be "collective responsibility" at the CB, while the BE approach puts relatively more emphasis on the accountability of individual council members. They also reflect the fact that since the second half of the 1990s countries such as the United Kingdom and Sweden have put in place an explicit mechanism of inflation targeting in conjunction with a numerically specified inflation target that is decided upon by government.2 In such systems the early publication of CB forecasts is believed to be an essential element of accountability because it enables the principal (government) to judge whether ex post deviations from the target were due to poor performance by the agent (the CB) or to unanticipated economic shocks. The colorful debate about the publication of forecasts and CB votes overshadowed two possibly more fundamental areas in which most (perhaps even all) existing central banks are rather opaque. One concerns the economic model, or models, used in making policy decisions, and the other concerns the operational objectives of the CB.
This paper focuses on those issues. It has two main parts. The first evaluates the degree of transparency about the economic models used by contemporary central banks and about their objective functions. It argues that, in spite of the recently acknowledged importance of transparency (particularly in some inflation-targeting countries), there is substantial haziness about the economic models used by CBs to generate forecasts as well as about their objective function. Some of this haziness is due to the absence of clear knowledge about the "true" model of the economy and some is due to the attempt of policymakers to hedge their positions in the face of model and of political uncertainties. …