Central Bank Independence, Accountability, and Transparency (eBook)

BERNARD J. LAURENS is currently Deputy Chief, Monetary and Capital Markets Department, International Monetary Fund, US. He began his career in the IMF in 1992. During his tenure, he has been extensively involved in domestic and external financial sector issues, and modernization and liberalization of countries monetary frameworks and exchange and capital account issues. He has authored several articles and publications on monetary and financial sector issues. Prior to joining the Fund, Bernard Laurens worked for the Bank of France. He also holds a degree in economics from the Institut d'Études Politiques of Paris.  MARCO ARNONE is Adjoint Professor of Economics and Finance of Emerging Markets (University of Eastern Piedmont) and Director of CeMaFiR, Italy. He has worked as an economist in the IMF's Monetary and Financial Systems and African departments, and has taught at Milan's Catholic and State Universities. Recent publications include: Primary Dealers in Government Securities (IMF 2005), Venture Capital for Development (V&P 2006), Banking Supervision: Quality and Governance, and Financial Supervisors Architecture and Banking Supervision (EE 2007), External Debt Sustainability and Domestic Debt in Heavily Indebted Poor Countries (RISS 2007), Central Bank Autonomy: Lessons from Global Trends (IMF 2008).   JEAN FRANÇOIS SEGALOTTO is a research fellow at the Centre for Macroeconomics& Finance Research (CeMaFiR), Italy. His research work and interests focus on monetary economics and institutions. Publications include: Central Bank Autonomy, Macroeconomic Performance, and Monetary Frameworks: a Global Comparison (Rubbettino, 2005); Measures of Central Bank Autonomy: Empirical Evidence for OECD, Developing, and Emerging Market Economies (IMF 2006); Central Bank Autonomy: Lessons from Global Trends (IMF 2008).

Cover 1
Half Title 2
Title Page 4
Copyright Page 5
Table of Contents 6
List of Figures 11
List of Tables 12
Notes on the Contributors 14
Foreword 16
Preface 18
Acknowledgements 20
Introduction 21
1 Survey of Models and Indicators of Independence 26
Introduction 26
Base indicators of independence 27
First indicator of de jure independence: Bade and Parkin (1977) 28
Alesina’s political response (1988, 1989) 30
Grilli, Masciandaro, and Tabellini (1991) 32
Two of the most widely used indicators: Cukierman (1992) 36
Aggregation of two legal measures: Alesina and Summers (1993) 38
A new legal indicator: Eijffinger and Schaling (1993) 40
Political vulnerability of central banks: Cukierman and Webb (1995) 40
Subsequent literature and empirical studies on base indicators 45
Theoretical and empirical clarifications on central bank independence 45
Endogenizing the inflation bias 49
Robustness of independence measures 52
Causality of hypotheses on central bank independence 55
Robustness and sensitivity of results, and search for new measures 61
Independence, credibility, and costs of deflation 71
Conclusions 79
Appendices: 83
I. Variables in Cukierman’s LVAU-LVAW indices 83
II. Variables in Cukierman’s QVAU-QVAW 87
III. Summary of base indicators of de jure independence 89
IV. Summary of base indicators of de facto independence 97
V. Summary of empirical studies on de jure independence 101
VI. Summary of empirical studies on de facto independence 108
2 Survey of Models and Indicators of Accountability 110
Responsibility and accountability 110
Responsibility 111
Accountability 111
The concept of accountability in the literature 113
Briault, Haldane, and King (1996): de jure and de facto accountability 113
Bini-Smaghi and Gros (2000): ex ante and ex post accountability 114
de Haan, Amtenbrink, and Eijffinger (1998): three main features 115
Castellani (2002) 117
Siklos (2002) 117
Time inconsistency and accountability 118
Delegating monetary policy to an independent central bank 118
Override 118
Contractual solution 119
Indicators and measures of accountability 119
Briault, Haldane, and King (1996) 119
de Haan, Amtenbrink, and Eijffinger (1998) 120
Bini-Smaghi and Gros (2000 and 2001) 122
Stasavage (2003) 124
Siklos (2002) 124
Accountability indices: comparison of empirical results 125
3 Survey of Models and Indicators of Transparency 127
Introduction 127
Rationales for transparency 128
Boost central bank credibility 128
Influence expectations 128
Protect central bank independence 129
Strengthen the understanding of monetary policy 129
Reduce informational asymmetries and uncertainty in financial markets 130
Enhance market efficiency 131
Eliminate government uncertainty on the performance of monetary policy 131
Enhance fiscal and monetary policy coordination 131
The concept of transparency in the literature 131
Transparency and accountability 131
Characteristics of transparency 132
Aspects of transparency in the policy-making process 134
Indicators and measures in the literature 136
General observations 136
Siklos (2002) 137
Eijffinger and Geraats (2004) 137
Stasavage (2003) 138
de Haan and Amtenbrink (2003) 140
Comparison between measures 141
Conclusions 142
4 Indicators of Independence, Accountability, and Transparency 144
Methodology for assessing central bank independence 144
General considerations 144
The GMT (1991) index 144
The Cukierman (1992) index 146
Assessment procedure and sampling 147
Methodology for assessing central bank accountability and transparency 147
General considerations 152
Detailed index of accountability 156
Detailed index of transparency 165
5 Global Trends in Central Bank Governance 171
Global trends in central bank independence 171
Central bank independence in the late 1980s 172
Central bank independence as of end-2003 172
Developments in central bank independence over time 179
Global trends in central bank accountability and transparency 183
Accountability scores 183
Transparency scores 187
Relationships between independence, accountability, and transparency 190
Accountability and transparency 190
Accountability and independence 193
Transparency and independence 9
Additional considerations 198
Conclusions 198
Global trends in central bank governance 199
Trends by stages of economic development and regions 199
Relative deficit of accountability 199
Relative deficit of transparency 202
Appendices: 207
I. Independence: country sample 207
II. Independence: political scores for advanced economies (2003) 210
III. Independence: political scores for emerging markets (2003) 212
IV. Independence: political scores for developing countries (2003) 214
V. Independence: economic scores for advanced economies (2003) 218
VI. Independence: economic scores for emerging markets (2003) 220
VII. Independence: economic scores for developing countries (2003) 222
VIII. Independence: evolution for GMT sample (late 1980s–2003) 222
IX. Independence: evolution for Cukierman sample (late 1980s–2003) 228
X. Independence: summary indices (late 1980s–2003) 233
XI. Accountability database (2006) 240
XII. Transparency database (2006) 244
XIII. Detailed governance scores 248
6 Independence and Inflation Performance: New Empirical Evidence 252
7 Policy Lessons from Global Trends 257
Overview 257
Relationships between the pillars of central bank governance 258
Consensus views 261
Principle 1: set price stability as one of the primary objectives of monetary policy 262
Principle 2: curtail direct lending to governments 262
Principle 3: ensure full independence for setting the policy rate 263
Principle 4: ensure no government involvement in policy formulation 263
Principle 5: ensure that accountability corresponds to the level of independence 264
Principle 6: ensure that transparency corresponds to the level of accountability and financial market deepening 264
Role of central banks in financial supervision 265
Theoretical considerations 265
Survey of practices 267
The way forward 269
Sequencing of reforms 271
Stage 1: clarify objectives and establish basic instrument independence 272
Stage 2: establish the building block of accountability 274
Stage 3: strengthen further political independence, accountability, and transparency 275
References 276
Index 284