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Monetary Policy Transparency
In broad terms, transparency of monetary policy can be defined as the extent to which central banks disclose information related to the policymaking process. Central banks have not traditionally been associated with policy transparency. However, central banks are increasingly open about the way they conduct monetary policy. This increase in the transparency of monetary policy -- and more specifically of central bank policymaking processes -- stems from a variety of factors. The majority of central banks are today politically and legally independent, which necessitates greater political and public accountability, and therefore greater openness and communication. Further, a certain degree of transparency is now thought to be essential for the credibility and effectiveness of monetary policy, as markets understand the rationale behind central bank decisions. Lastly, as central banks almost always have to balance sometimes contradictory objectives such as price stability and economic growth, central banks need to explain and discuss their policies to gain legitimacy for their decisions. An important benefit of increased monetary policy transparency, apart from the benefit of greater institutional accountability and integrity, is reduced policy uncertainty, which has a positive impact on the accuracy of private sector financial forecasts. With greater forecast accuracy, market participants are more inclined to take longer-term perspectives in their economic decisions, ultimately benefiting long-term growth. The IMF's Code of Good Practices on Monetary and Financial Policies To make the concept of monetary policy transparency more applicable in the wake of the 1997 Asian Financial Crisis, the Interim Committee of the International Monetary Fund (IMF) called for a code of transparency practices for monetary and financial policies. In cooperation with the Bank for International Settlements, and in consultation with a representative group of central banks, financial agencies, and other relevant international and regional organizations, the IMF developed the Code of Good Practices on Transparency in Monetary and Financial Policies, which was adopted by the Interim Committee of the IMF on September 26, 1999. The Code parallels the Code of Good Practices in Fiscal Transparency developed by the Fund and endorsed by the Interim Committee in April 1998. According to the introduction of the Code, transparency refers to an environment in which the objectives of policy; its legal, institutional, and economic framework; policy decisions and their rationale; data and information related to monetary and financial policies; and the terms of agencies' accountability are provided to the public on an understandable, accessible, and timely basis. Thus, the transparency practices listed in the Code focus on: (1) clarity of roles, responsibilities, and objectives of central banks and financial agencies; (2) the processes for formulating and reporting of monetary policy decisions by the central bank and of financial policies by financial agencies; (3) public availability of information on monetary and financial policies; and (4) accountability and assurances of integrity by the central bank and financial agencies. The design of the IMF's Code rests on the two principles that monetary and financial policies are more effective if the public and markets understand, and central banks commit to them, and that more autonomous and independent institutions necessitate greater accountability. It is important to note that the Code does not judge the soundness of monetary policy. The introduction to the Code explicitly states that "while good transparency practices for the formulation and reporting of monetary and financial policies help to contribute to the adoption of sound policies, the Code is not designed to offer judgments on the appropriateness or desirability of specific monetary or financial policies or frameworks that countries should adopt." Applicability of the Code The Code has two parts: transparency of monetary policy and transparency of financial policies. Only the first part of the Code, focusing on the transparency practices for central banks with respect to monetary policy, is part of eStandardsForum's assessment. The IMF assesses the transparency of monetary and financial policies in the context of the "Reports on the Observance of Standards and Codes" (ROSC), which include an IMF staff commentary indicating prioritized recommendations for improved observance. As of August 2005, the latest date on which summary information is provided by the IMF, 77 ROSC modules on transparency in monetary and financial policies had been completed (of which 10 had been conducted as updates). Of these, 51 had been published on the IMF website, as publication is voluntary. For its country assessments against the IMF's Code of Good Practices on Transparency in Monetary and Financial Policies, eStandardsForum draws on the IMF's ROSCs and the Article IV consultations between the Fund and its members states, as well as other publicly available sources, such as the monetary policy transparency reports by Oxford Analytica, a research firm, for the California Public Employees' Retirement System (CalPERS), and other information made available by central banks and other institutions relevant for monetary policy.
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Standard Setting Body
Further Reading Arora, V., “Monetary Policy Transparency and Financial Market Forecasts in Eijffinger, S. and Geraat, P., "How transparent are Central Banks?" Faculty Paper. January 2005.
International Monetary Fund, "Assessments of the IMF Code of Good Practices on Transparency in Monetary and Financial Policies –Review of Experience," Prepared by the Monetary and Financial Systems Department, Washington DC: IMF, December 23, 2003. Mishkin, Fredric, "Can Central Bank Transparency go too far?," NBER Working Paper No. 10829, October 2004 Thornton, D., "Monetary Policy Transparency: Transparent about what?," Working Paper 2002, Federal Reserve Bank of St.Louis, November 2002. |