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Transparency and accountability of central banks

Daniel Lefort Deputy General Counsel

Bank for International Settlements

Introduction

In the last twenty years, central banks around the world have become more

independent from political authorities. In Europe, the Maastricht Treaty has made

central bank independence a condition precedent to participation in European

Monetary Union. In other parts of the world, including in emerging economies,

governments have been pressed both internally and externally (for instance through

recommendations from the IMF) to grant independence to their central banks.

In Latin America, significant progress has been made towards central bank

independence, starting with Chile in 1989 and followed by Columbia in 1991,

Venezuela and Argentina in 1992, and Mexico in 1994. More recently, Peru and

Brazil have taken legislative action towards adoption of central bank independence.

This movement towards independence for central banks has been supported by a

quasi unanimous consensus among scholars and policymakers that central bank

independence is desirable from the standpoint of public policy. However, an

independent central bank may be independent in some respects but highly

constrained in others. It may be relatively free from short-term political pressures and

enjoy a high degree of autonomy, but be constrained in the goals which have been

set for it: to maintain price stability and/or meet other objectives contained in its

charter, such as maintaining the stability of the financial system, enhancing

employment, or facilitating economic growth.

There are, however, certain limits to central bank independence. No central bank can

be totally independent in the sense that it does not have to report to anyone. Indeed,

as with any public institution, principles of good governance require that central

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banks which are given a sufficient degree of autonomy operate in a clear legal and

operational framework. The central bank should act in a transparent manner by

keeping the government and the public continually informed of its actions. In addition,

regular discussions between the central bank, the government and the legislative

branch need to be established, in order for the central bank to be accountable for its

actions.

Independence requires accountability and accountability requires transparency. On

the other hand, transparency and accountability can justify and increase support for

independence by introducing a system of “checks and balances” to the autonomy

accorded to the central bank.

It has been said that transparency and accountability have become two of the most

important watch words in discussions of economic and financial policy today: greater

transparency allows decisions to be better informed, while better accountability

imposes firmer discipline on decision-makers. Together, they can contribute to

higher-quality decisions in central banks.

In recent years, a number of books, reports and articles have been devoted to central

bank independence, governance, transparency and accountability. These issues

were discussed at a number of conferences by monetary economists. Working

groups of representatives from finance ministries, central banks and international

organisations were also formed to discuss and present reports on the topic of

transparency and accountability.

This presentation draws on a number of studies conducted so far on the subject of

transparency and accountability and, in particular, on the Code of Good Practices on

Transparency in Monetary and Financial Policies adopted by the Interim Committee

of the IMF on 26 September 1999. This Code was developed by the IMF working

together with the BIS and in consultation with CEMLA and a number of central banks,

financial agencies and other international and regional organisations. The Code

identified desirable transparency practices for central banks and lists among

desirable practices accountability and assurance of integrity by the central banks.

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Presentation outline Central banks operate in different historical, cultural, political and institutional

environments. This explains why the degree of autonomy of central banks and the

nature of transparency and accountability arrangements adopted to counterbalance

such autonomy vary from country to country. It would not be possible in this short

presentation to provide even an overview of the solutions adopted in various

jurisdictions to deal with these issues. I therefore propose to address this interesting

topic from a lawyer’s perspective and in very general terms.

In the first part of this presentation on transparency, I will try to define what is central

bank transparency (1), the reasons for central bank transparency (the “why” of

transparency) (2), the various aspects of transparency at the different stages of the

central bank’s decision-making process (3), the transparency practices of central

banks (the “what” of transparency) (4), and the methods of central bank transparency

(the “how” of transparency) (5).

In the second part of this presentation, I will first attempt to define accountability (1)

and then consider successively the preconditions to accountability (2), the need for

accountability of central banks (the “why” of accountability) (3), and the modalities of

accountability (the “how” of accountability) (4). I will close this presentation by

providing a brief description of recent efforts to measure the accountability of central

banks by using a so-called “democratic accountability index” (5).

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I. Central Bank Transparency

Traditionally, central banks had a reputation for secrecy and mystery; their language

was often designed to blur and obfuscate. “If I seem unduly clear to you, you must

have misunderstood what I said”, was one of the memorable replies given by a

central bank governor to a member of parliament some twenty years ago. Times

have changed and the great majority of central banks have become more transparent

in recent years. But how can transparency by defined when applied to central banks?

1. Transparency defined “A central bank is transparent when it provides at all times sufficient information for

the public to understand the policy regime, to check whether the bank’s actions

match the regime and to pass judgment on its performance.”1

“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 in a comprehensive, accessible and timely

manner.”2

Transparency relates to a central bank’s openness in explaining the rationale behind

its specific policy decisions. The rationale for policy actions cannot be fully

understood unless the central bank makes clear its long-term objectives, as well as

its strategic goals and its short-term tactics to achieve them. The central bank should

also describe the economic environment in which it expects its actions to be felt.

Information may be considered as the key to the evaluation of central bank

performance. A trend towards increased transparency of central banks can be

witnessed in most countries. This can be attributable to the central bank itself or to

legislation which prescribes transparency as a quid pro quo for independence of the

1 “Why do Central Banks Need to Talk”, p. 10 - Report published by the International Centre for Monetary and Banking

Studies (ICMB) - Geneva (2001). 2 IMF Supporting Document to the Code of Good Practices on Transparency in Monetary and Financial Policies - Glossary of

Key Terms (July 2000).

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central bank concerned. Through transparency, independent central banks can gain

public confidence and support. This may be the best protection against governmental

and legislative intervention and for the preservation of the central bank’s independent

status.

Indeed, transparency may be regarded as one of the most important conditions of

central bank independence. Government and the public should be provided with

regular and detailed information on monetary policy. This implies the publication of

comprehensive statements following central bank meetings and publication of

economic reports and quarterly bulletins.

Several developments have occurred in recent years which provide impetus for

central banks to practice greater transparency in the conduct of their activities. These

developments include:

First, a greater expectation on the part of the general public to obtain information

about the policies and activities of central banks. The public, the media, the markets

and the legislature all expect that central banks be more open.

Second, policy makers have recognised that globalisation in general and

international integration of financial markets and products in particular require a

greater degree of transparency of monetary and financial policies as a means of

containing market volatility.

Third, transparency is also a means to monitor progress made by central banks in

attaining their policy objectives, thus increasing credibility and effectiveness of

monetary policy.

Fourth, advances in communication technology and increased public access to

means of electronic communications, such as the internet have greatly reduced the

difficulties, costs and delays in disseminating information to the public.

2. The reasons for central bank transparency - the “Why” of transparency There are two main reasons to promote the transparency of central banks. First, the effectiveness of monetary and financial policies can be strengthened if the

goals and instruments of the central bank policy are known to the public and if the

authorities can make a credible commitment to meeting them. By making available

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more information about monetary and financial policies, good transparency practices

promote the potential efficiency of markets.

Second, the democratic accountability of central banks (which will be considered in

the second part of this presentation) is another reason to promote transparency.

Good governance calls for central banks to be accountable, particularly when

granted a high degree of autonomy. Transparency in the mandate of the central bank

and clear rules of procedure for its operations ensure good governance and facilitate

policy consistency.

The case in favour of transparency is strong: the presence of an information

asymmetry between the central bank and the public calls for full transparency: the

central bank knows more about itself, its instruments and its intentions than the

public does. This asymmetry can create misunderstandings. Transparency increases

credibility and reduces uncertainty. It enables the public to understand and possibly

anticipate the central bank’s decisions. Transparency therefore leads to more

effective monetary policy, in particular because it facilitates better decision-making by

the public.

“Transparency improves policy, because policy makers operating in the light

of day cannot do some of the things they can do in the dark of secrecy.”

(Stanley Fischer, 2001)

All information should be released, unless a good case can be made to the contrary,

for instance in order to preserve the confidentiality of proprietary information on

financial institutions collected by central banks, or in the case of foreign exchange

market transactions. More generally, central banks need to balance the efficiency

and accountability gains of greater transparency against the need for confidentiality.

Looking now at possible arguments against transparency, it has sometimes been

held that monetary policy, in order to be effective, has to be unanticipated. Central

banks need to be “ahead of the pack”.

Another argument invoked against transparency is that the public may read too much

and get confused in interpreting the information released by central banks, and that

the more transparent a central bank becomes, the more signals it sends, the more

volatile are the financial markets.

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Transparency would also require additional resources in order for the central bank to

communicate effectively. Thus, the cost of transparency in terms of compiling and

disseminating information and the risks of provoking adverse market reactions could

be considered to exceed potential benefits.

Although, in certain instances, there may be sound policy reasons for a central bank

not to reveal everything, non-disclosure should be the exception rather than the rule.

In this connection, it would be useful if explicit legal provisions laid down the

conditions under which information may be withheld by the central bank.

3. The various aspects of transparency at the different stages of the central bank’s decision-making process

Transparency of monetary policy can be defined as the extent to which central banks

disclose information related to the policy-making process. It seems therefore natural

to distinguish, at the different phases of this process, five aspects of transparency3:

political, economic, procedural, policy and operational transparency. Each of these

aspects may give rise to different motives for transparency:

Political transparency refers to openness about policy objectives. This comprises a

statement of the formal objectives of monetary policy, including an explicit

prioritisation in case of potentially conflicting goals, and quantitative targets. Political

transparency is enhanced by institutional arrangements, like central bank

independence, central bank contracts and explicit override mechanisms, because

they insure that there is no undue influence or political pressure to deviate from

stated objectives.

Economic transparency focuses on the economic information that is used for

monetary policy. This includes the economic data the central bank uses, the policy

models it employs to construct economic forecasts or evaluate the impact of its

decisions, and the internal forecasts the central bank relies on.

Procedural transparency is about the way monetary policy decisions are taken. It

involves an explicit monetary policy rule or strategy that describes the monetary

3 On this conceptual framework for transparency, see Eijffinger, S.C.W. and Geraats, P.M. How Transparent are Central

Banks. Discussion Paper Series No. 3188. Centre for Economic Policy Research (CEPR).

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policy framework, and an account of the actual policy deliberations and how the

policy decision was reached, which is achieved by the release of minutes and voting

records.

Policy transparency means a prompt announcement of policy decisions. In addition,

it includes an explanation of the decision and a policy inclination or indication of likely

future policy actions. The latter is relevant because monetary policy actions are

typically made in discrete steps; a central bank may be inclined to change the policy

instrument, but decide to wait until further evidence warrants moving further.

Operational transparency concerns the implementation of the central bank’s policy

actions. It involves a discussion of control errors in achieving the operating targets of

monetary policy and (unanticipated) macroeconomic disturbances that affect the

transmission of monetary policy.

4. Transparency practices of central banks - the “What” of transparency Transparency for central banks refers to an environment in which the objectives of

monetary and financial policy, their legal, institutional and policy framework,

monetary and financial policy decisions and their rationale, data and information

related to these policies and the terms of central bank accountability, are provided to

the public in a comprehensive, accessible and timely manner.

In this connection, the IMF Good Transparency Practices for Monetary Policies by

Central Banks (which appear as a Supporting Document to the IMF Code of Good

Practices on Transparency) identify four categories of transparency practices by

central banks. These four categories correspond, in part, to the different stages of the

central bank’s decision-making process which we briefly described in the previous

section.

1. Clarity of roles, responsibilities and objectives of central banks

2. Open processes for formulating and reporting on monetary policy decisions

3. Public availability of information on monetary policy

4. Accountability and assurances of integrity by the central bank

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1. Clarity of roles, responsibilities and objectives of central banks

The roles, responsibilities and objectives of the central bank should be clearly

defined in relevant legislation or regulation. Central banks should reveal what they

are trying to achieve, the fundamental principles governing their actions and any

changes in objectives.

Central banks may have quantitative objectives or qualitative objectives referring to

broad goals of an unspecified nature (for example, price stability). In the presence of

multiple objectives, it is important for the central bank to explain each objective and

to set priorities among them.

Transparency is about sharing certitudes as well as doubt and promptly revealing

shifts in the priorities when they occur.

2. Open processes for formulating and reporting on monetary policy decisions by central banks

The central bank should describe and explain to the public the framework,

instruments, methods (data, models, forecasts, simulations) used to pursue the

objectives of monetary policy. Changes in monetary policy should be announced at

the time or soon after they occur and the central bank should issue public statements

on progress made towards achieving its monetary policy objectives.

3. Public availability of information on monetary and financial policy decisions

Presentation and release of central bank data should meet the standards relating to

coverage, periodicity, timeliness of data and access by the public consistent with IMF

data dissemination standards.

Central banks should facilitate dissemination of comprehensive and reliable

information to financial markets, the general public and economic and financial

policy-makers. This information should include, in particular, the central bank’s

balance sheet, together with information on the central bank’s market operations.

However, for policy, strategic and confidentiality considerations, disclosure of the

central bank’s market operations should be on an aggregated or consolidated basis.

Central banks should also establish and monitor public information services for the

dissemination of information on the central bank’s policies and operations and on

monetary and financial matters. Such public information services should

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communicate with the general public as well as with the press, parliamentarians and

NGOs.

Central banks should have a publication program, including an Annual Report, and

have texts of regulations issued by them readily available to the public.

4. Accountability and assurances of integrity by the central banks

Officials of the central bank should be available to appear before a designated public

authority to report on the conduct of monetary policy, explain the policy objectives of

their institution, describe their performance in achieving these objectives and, as

appropriate, exchange views on the state of the economy and the financial system.

Central banks should publicly disclose audited financial statements of their

operations, as well as information on their operating expenses and revenues. In

addition, central banks should develop and publicly disclose standards for the

conduct of personal financial affairs of their officials and staff, so as to prevent

possible conflict of interest situations.

5. Means and methods of communication by the central bank - the “How” of transparency

There are a variety of means and methods of communicating with the public on the

roles, policies, decisions, performance and operations of the central bank.

One form of disclosure for those aspects of the central bank related to its roles,

responsibilities and objectives is through legislation or regulation. Another form

consists in the issue of monetary regulations, guidelines or rulings.

For practices relating to overlapping responsibilities between or among different

institutions, such as the central bank, the finance ministry or other financial

institutions, a publicly released memorandum of understanding may be an effective

disclosure method. Other forms of disclosure include written reports, press releases,

speeches and appearances by officials of the central bank, official publications,

bulletins and the annual report. Last but not least, central bank websites are effective

means for central banks to communicate with a wider public about central bank

policies and operations.

In order to achieve effective transparency, central banks will rely on several of the

forms of disclosure mentioned above, depending on the subject matter, the targeted

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audience, and how decisions are made within the central bank. In the case of a

decision by an individual, a statement may be issued, while if the decision taken is

the result of deliberations by a committee, it might be more appropriate to issue

minutes of that committee meeting, expressing the different (and sometimes

diverging) views of committee members.

While all methods and means of communication can lead to good transparency

practices, certain key features of the central bank’s operations should preferably be

specified in legislation, for instance in a central bank law, so as to give these

provisions prominence and avoid ad hoc and frequent changes. On the other hand,

information on policy issues and the provision of information of a general nature can

be presented in a more flexible manner. What is important is that the information be

readily accessible to the public at large.

Some means of disclosure may have limitations. For instance, legislation or

regulations may sometimes be too technical or complex to be understood by a large

audience and may not be readily accessible. These may need to be accompanied by

explanations or guidelines. However, all such texts may be posted on the central

bank’s website for ease of consultation by a wide audience. Memoranda of

understanding are often treated as sensitive internal documents and may not be

publicly available. The Annual Report, which is an essential reference document,

does not represent a timely and up-to-date source of information on latest

developments.

All methods and means of communication described above can be used extensively

by the central banks for greater transparency. In effect, by providing the information

through these various channels on past and prospective economic developments,

central banks promote accountability for their actions.

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II. Central Bank Accountability

1. Accountability defined It is difficult to find an accurate and comprehensive definition of what constitutes

accountability. Accountability has been defined as a mechanism, existing between

holders of delegated power and those who have the formal power to replace them.

Accountability includes everything which those who have delegated the power find

relevant to their decision whether to continue or withdraw their confidence.

Accountability implies the obligation (i) to give an “account”, that is to provide full

information about and explain one’s actions, and (ii) to respond to concerns about

one’s actions.

Accountability should be distinguished from “control” - which implies check, test or

verification in a system where the principal remains in charge. Accountability, on the

other hand, is used in situations where the principal has charged someone with the

exercise of a certain task, thereby giving up the basic control.

When transferred to the present context, the central bank constitutes the accountable

party who holds the power over monetary policy with the executive government

and/or parliament being in charge of review.

Accountability can take different forms = political, financial, managerial, operational,

legal, professional. It can be to different authorities, institutions or individuals. It can

operate through different channels, such as direct superiors reporting or consultation

(in public or private) and through procedures (such as complaints) which can be

activated when required.

The concept of accountability requires, at the very least, that the central bank explain

and justify its actions and decisions and give account of the decisions made in the

execution of its responsibilities. Accountability should be “diversified” to include

parliamentary accountability as well as the judicial review of the central bank’s acts

and decisions, so as to ensure their legality. In addition, cooperation with the

executive is also needed to ensure consistent overall policy-making.

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Besides this “institutional” articulation of accountability (through the legislative,

executive and judiciary branches), there are other forms of accountability, namely

disclosure, performance control and the factual support of public opinion.

2. Preconditions to accountability There are at least two preconditions for central bank accountability:

- First, there needs to be a clear statement of the ultimate objective and

institutional framework of monetary policy setting out the mandate of the

central bank for which it can be held accountable.

- Second, there needs to be a sufficient degree of central bank transparency

and disclosure to facilitate the verification of the compliance of the central

bank policy with its mandate and therefore achieve accountability.

The Good Transparency Practices for Monetary Policy by Central Banks approved by

the Executive Board of the IMF in July 2000 (Section 1.1) recommend that the

ultimate objective(s) of monetary policy be defined in legislation or regulation,

including, where appropriate, a central bank law.

A clear statement of the ultimate objectives identifies the mandate of the central

bank. By defining these objectives in legislation or regulation, the central bank can be

held accountable, as the public may compare outcomes with goals of the central

bank.

As O Issing remarked, “the more clearly and precisely the mandate is defined, the

easier it will also be in a democracy to monitor the performance of the central banks”.

It will be easier to hold a central bank accountable for its actions if clear objectives

have been set and, in the case of multiple objectives, if a hierarchy has been

established between them.

Legal basis for central bank accountability

Central bank accountability may be established in the constitution, in special

legislation or in the statute of the central bank. In cross-border central banking

systems (such as the ESCB), it may be set out in a treaty. Central bank

accountability may also derive from general principles of public accountability

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applicable to public institutions, or from the practice of central banks to account for

their actions.

Whatever the legal texts, the general principles or the practice, there should be

indications as to the person or bodies to which the central bank is accountable and

the mechanisms to achieve accountability.

The nature of the legal texts establishing the accountability of the central bank is of

significance. It can provide an indication as to the degree of independence and

authority of the central bank as a public institution in the country concerned. It also

determines the procedure which would need to be followed to change the legal basis

of the central bank.

A recognition of the central bank in the constitution, alongside other institutions such

as the judiciary process, will normally provide the central bank with a higher degree

of legitimacy and independence than would be the case for a central bank created by

an Act of Parliament. The possibility of changing the legal basis of a central bank

recognized by the constitution will, in most legal systems, be subject to the more

stringent procedures applicable to constitutional reforms and require a broader public

consensus.

Whatever the legal basis, however, the law of the central bank and the provisions

relating to its accountability may be subject to change. This may be the most drastic

method for holding the central bank accountable: parliament can decide to amend

the legislation it has passed; it can decide to change the structure of the central bank,

as well as its tasks.

The legal basis of the central bank can be considered both as a mechanism of ex

ante and ex post democratic accountability. In adopting legislation creating the

central bank and setting out certain modalities for the control of its operations,

parliament exercises ex ante accountability.

Should parliament decide to amend the central bank law it has passed to sanction

certain behaviour or performance of the central bank, it would then exercise what

may be characterised as the most drastic measure of ex post accountability.

According to the IMF Good Transparency Practices (item 1.1.5), “the broad

modalities of accountability for the conduct of monetary policy and for any other

responsibilities assigned to the central bank should be specified in legislation”.

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Modalities of accountability refer to the various methods and procedures which may

be used by a central bank to account for its actions and report on its activities. These

can include the annual report of the bank, written reports submitted to Parliament,

published reports in an official bulletin or public appearances by central bank officials

before parliament or parliamentary committees.

There are obvious advantages to establishing the modalities of accountability in

legislation. First, this creates a legal obligation for the central bank to provide

information to the public on its monetary policy activities and other responsibilities.

Second, it allows the legislation to set clear and firm standards on the nature and

periodicity of disclosure which the central bank must follow on an ongoing basis. Last

but not least, it establishes the principle of public accountability of the central bank.

3. The need for accountability of central banks - the “Why” of accountability

All public entities need to be accountable, both for achieving their objectives and for

the use of the resources which are entrusted to them. Thus, good governance calls

for central banks to be accountable, particularly when they have been granted a high

degree of autonomy. Indeed, the movement towards central bank independence has

caused concerns about democratic legitimacy, which gives rise to accountability

requirements that necessarily presuppose greater transparency.

The basic argument for the democratic accountability of central banks is that they

stand for the delegation of powers to independent unelected officials and that such a

delegation is acceptable in a democratic society only if central banks, one way or the

other, are accountable to democratically elected institutions. Accountability can be

therefore regarded as a form of “checks and balances” in a system of central bank

independence, which legitimises the position of the central bank within a country’s

constitutional system. Accountability prevents the central bank from being completely

independent of the government’s ultimate political control.

There is sometimes a misconception that transparency can provide sufficient

accountability for central banks in democratic societies. Indeed, accountability

requires transparency as “effective scrutiny implies effective access to information”.

Transparency, however, does not by itself ensure accountability, as it cannot keep in

check the exercise of central bank discretion.

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Accountability becomes increasingly important as countries entrust the conduct of

monetary policy to central banks. While some degree of transparency is a necessary

condition for accountability, it does not suffice as such. Transparency relates to pure

information disclosure, but accountability also includes bearing responsibility for

monetary policy actions and possible sanctions when a policy appears deficient.

4. Modalities of accountability - the “How” of accountability “Modalities of accountability refers to the means, methods, and procedures

used by a central bank or financial agency to account for its actions and

report on its activities.”4

Accountability arrangements can take many forms and vary in degree, ranging from

needing to explain policies of the central bank (to the public, the legislator or the

government) to the imposition of sanctions if objectives are not achieved or a

possible override of a central bank decision. In order to consider the full range of

accountability arrangements, it is necessary to refer both to legal provisions (de jure

mechanisms), as well as to practices followed by the central bank which are not set

out in laws or rules (de facto accountability mechanisms).

The IMF Good Transparency Practices (Section IV) lists transparency practices on

“Accountability and assurances of integrity by the central banks”. These practices are

elaborated upon in the Supporting Document to the Code which reflects a broad

range of experiences of accountability by the central banks, on the basis of

questionnaires addressed by the IMF to central banking institutions. Good practices

recommended by the Code to promote the accountability of central banks include

- reporting by central bank officials before designated public authorities;

- public disclosure of audited financial statements;

- information on the operating expenses and revenues of the central bank;

- standards of conduct for officials and staff of the central bank.

4 IMF Supporting Document to the Code of Good Practices on Transparency in Monetary and Financial Policies - Glossary of

Key Terms (July 2000).

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Other parts of the IMF Code (Section I) focussing on the clarity of roles,

responsibilities and objectives of central banks also refer to accountability

arrangements. These include

- override mechanisms allowing the government, in exceptional circumstances,

to overrule or change a decision of a central bank;

- appointment, reappointment and dismissal procedures for the head and

members of the governing body of the central bank.

Let us now consider these various good practices to promote accountability. These

practices, to some extent, overlap some of the transparency practices which were

described earlier. This further demonstrates the extent to which transparency and

accountability are intertwined.

1. Reports by central bank officials to public authorities

Central bank officials should appear regularly before a designated public authority,

typically elected government bodies (parliament or parliamentary committees). The

purpose of these appearances, in open or closed sessions, is to report on the

conduct of monetary policy by the central bank, to explain and clarify its policy

objectives and describe the central bank’s performance in achieving such objectives.

These appearances should take place at least once a year and more often in case of

major developments affecting the conduct of monetary policy.

It should be mentioned that the review of monetary policy by parliament or by

legislative committees occurs in a large majority of countries. Such a review allows

the central bank to be independent from the government, while at the same time

being held democratically accountable. Oversight by the legislator can be an effective

means of addressing concerns that monetary policy is being conducted by unelected

and unaccountable officials.

2. Public disclosure of audited financial statements

The central bank should publicly disclose audited financial statements of its

operations with a view to promoting ex post accountability. These financial

statements, to be audited by independent auditors, should be prepared according to

best practices, using high-quality internationally acceptable accounting standards.

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The central bank should also adopt and publicly disclose internal governance

procedures, including internal audit arrangements, providing the basis for

consistency, reliability and completeness of information on its operations.

3. Information on the operating expenses and resources of the central bank

Disclosure by central banks of information on their operating expenses and revenues

plays an important role in achieving financial transparency, good governance and

accountability. It also contributes to the markets’ and public’s confidence in the

integrity of the central bank and its ability to perform its public functions effectively.

The financial autonomy of the central banks which in most countries are self-

supporting and do not receive money out of the government budget, does not imply

that some form of budgetary control may not be exercised over operating expenses

and resources. It is thus not surprising that ex post budgetary accountability first

focuses on the disclosure and review of the annual accounts by independent

auditors, followed possibly in some jurisdictions by a review in a court of auditors.

Information on operating expenses and resources may be publicly disclosed, either

separately or through periodic reports on the central banks financial operations,

consisting of the audited financial statements, including a balance sheet, an income

statement and notes to the accounts. The income statement should disclose the

amounts of the principal types of income and expenses, including salaries, premises

and office expenses.

4. Standards of conduct for officials and staff of central banks

Guidelines, rules and regulations should be issued to set out the principles for the

conduct of personal financial affairs and reporting of financial and business interests

of officials and staff of central banks. These standards should be made public in

order to strengthen the credibility of the central bank. Public access and knowledge

of the rules of conduct for officials of central banks are also ways of making central

banks accountable.

In many cases, rules relating to the conduct of personal financial affairs applicable to

the government also apply to central banks. Most central banks document these

rules (either those applicable to the government or the central bank’s own rules) in

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the employee handbook or state them in employee contracts. The rules may also be

embodied in a code of conduct issued by the central bank.

5. The override mechanism

In extreme circumstances, where there is a disagreement between the government

and the central bank, the government may, in certain jurisdictions, have the authority

to override a particular monetary decision of the central bank.

Different mechanisms exist in this connection: this includes constructions providing a

government with the right to give instructions, to approve, suspend or defer decisions

of the central bank, or to censor decisions on legal grounds. In a limited or

provisional override mechanism (such as the one in place at the Bundesbank) the

government can only delay the taking of a central bank decision for a limited time

period. In a full override mechanism (such as the ones in place at the Nederlandsche

Bank and at the Bank of England), the government can direct the central bank to

implement monetary policy for objectives other than those set out in the legal basis of

the central bank.

The transparency of override mechanisms is enhanced if there are clear and publicly

disclosed rules governing the conditions and manner in which they may occur. This

can improve the accountability of both the government and the central bank.

Legislation provides an effective means of specifying the rules and procedures that

govern these situations and how the public is informed when they arise in what is

likely to be a rare event.

6. Appointment, terms of office and dismissal of central bank officials

Procedures for appointment, terms of office and conditions for the removal of the

heads and members of the governing body of the central bank should be set out in

legislation. Details of these procedures should provide the public with a clear

understanding of the process concerned.

Most countries have some form of legislative requirements for appointment to and

dismissal from the governing body of the central bank. Many countries specify a

maximum term of appointment for officials and indicate whether reappointment is

permitted and the maximum number of terms possible. In many countries, members

of the governing board of the central bank can be removed from office (or are

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ineligible for office) if they are found guilty of misconduct or are convicted of serious

crime, if they are declared bankrupt, if they become incapacitated or unable to

perform the duties of their office, if they are absent from several board meetings in a

row, or if the accept employment or become a member of parliament.

5. Measurement of accountability - the democratic accountability index A democratic accountability index has recently been developed in an attempt to

determine and compare the degree of (legal) democratic accountability of central

banks on the basis of central bank laws.5 This exercise follows previous attempts to

rate central banks on the basis of their degree of independence.

The detailed set of criteria on which this accountability index is based only refers to

statutory provisions and cannot therefore account for all relevant aspects of the

democratic accountability of central banks. Other factors would need to be

considered, such as historic and social developments and practices in the countries

concerned, which also impact on the degree of accountability. Nevertheless, the

democratic accountability index provides a useful - although imperfect - tool to

evaluate the degree of accountability of central banks.

The index is drawn up against the background of three groups of questions referring

to what is considered as the three main features of democratic accountability.

- The decisions about the final objectives of monetary policy: this includes

the first four aspects, the question whether the central bank law stipulates

the objectives of monetary policy (1) and thereafter clearly prioritises (2),

defines (3), and quantifies (4) the objectives.

- Transparency of actual monetary transparency: the next three aspects

cover the issues whether the bank publishes an inflation or monetary

policy report (5), makes public the minutes of the meeting of the monetary

policy board within a reasonable time (6), and explains publicly to what

extent it has been able to reach the quantified objective (7).

5 Amtenbrink, F. - The Democratic Accountability of Central Banks, A comparative study of the European Central Bank

(1999).

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- Final responsibility for monetary policy: six aspects make up this last

group of questions, namely monitoring of the central bank by Parliament

(8), a right of government (or Parliament) to give instructions (9), the

existence of a review as part of the procedure to apply the override

mechanism (10), a right of the central bank to appeal against the

application of the override mechanism (11), a parliamentary right to

change the legal basis of the bank by a simple majority vote (12), and

whether the legal basis of the bank foresees a performance-based

dismissal (13).

There have been other studies building on different methodologies to measure the

degree of independence and accountability of central banks. I should mention here

the IMF-sponsored research conducted by Jácome in 2000 to evaluate the degree of

central bank independence and accountability in Latin-American countries against a

set of ten criteria referring to the objectives legally assigned to central banks, the

political autonomy of the central bank, and the accountability and the transparency of

its policies and procedures. A description of this study appears in a report on “Central

Bank: Independence, governance and accountability” by Fausto de Andrade Ribero,

published in December 2002 by the Institute of Brazilian Issues of the George

Washington University in Washington, DC.

Conclusion

In conclusion, the recent trend towards greater transparency and accountability is

obviously beneficial and should be encouraged. Transparency provides for greater

openness and allows decisions to be better informed while accountability imposes

firmer discipline on decision-makers. Together, transparency and accountability

support central bank independence and monetary policy effectiveness.