Central banks are getting more transparent, study finds

The trend for central banks to become more transparent and more independent survived the onset of the global financial crisis, according to the third edition of a study conducted since 2007 by Barry Eichengreen and Nergiz Dincer, published today by the Bank of Korea.

The study, Central Bank Transparency and Independence: Updates and New Measures, published as a Bank of Korea working paper, adds data for the years 2007-2010 inclusive to the existing data set which starts in 1998, and now includes more than 100 central banks.

As has been the case since 2002, Sweden's Riksbank comes out as the most transparent, scoring 14.5 points out of a possible 15. New Zealand has been scoring 14 since 2002, putting it in second place. The Bank of England drops to fifth place this time, overtaken by the National Bank of Hungary on 13.5 and the Czech National Bank on 12 points.

The transparency ratings are scored using five criteria: political transparency, including transparency over the central bank's mandate; economic transparency, including the publication of central bank forecasts and transparency over the models it uses; procedural transparency, analysing if a central bank uses an explicit policy rule or strategy in setting monetary policy, and also transparency over the decision-making process and deliberations; policy transparency, referring to a central bank's communication of its decisions and intentions; and operational transparency, measuring whether a central bank evaluates its own success in achieving its objectives.

Each of the five categories has three opportunities to score 0, 0.5, or 1, giving a maximum of 15. In the case of the UK, because the Bank of England in 2009 added financial stability to its price stability mandate, it lost 0.5 from its political transparency rating, leaving it with a total of 11.5.

The Bank of England is just ahead of the European Central Bank (ECB), with 11 points – though the ECB could, if it goes ahead with its intention to publish its minutes shortly after decisions are taken, leapfrog the BoE to 12 points – and potentially score higherif it lets on which member of the governing council voted which way.

The Federal Reserve is tied with the ECB on 11, though it loses one point for not quantifying its primary objective, and half a point for having "multiple objectives without prioritisation".

The average score for transparency was 5.5 in 2010, up from 3.2 in 1998. During the period, 10 countries have stayed at the same level, and only one has become less transparent: Uruguay, on account of it stopping publishing reports in English after 2006, though the authors say it has indicated its intention of reversing this change and again publishing reports in English in coming years.

The least transparent central banks are now, as since the start of the survey, to be found in "offshore financial centres and autocratic regimes in North Africa and the Middle East", the study says.

As a general rule, countries with higher per capita incomes, deeper financial markets, more open economies and stronger political institutions have more transparent central banks.

Fed, RBI, MAS and Sama weak on independence

The second facet of the study looks at the independence of central banks. Here the top-ranked central banks are perhaps surprising: the most independent is the central bank of the Kyrgyz Republic, whose governor was interviewed in Central Banking journal earlier this year. Her institution is followed in the rankings by the central banks of Latvia, Hungary, Armenia and Bosnia.

The US Federal Reserve finds itself in the company of the Saudi Arabian Monetary Agency (Sama), as well as the Reserve Bank of India (RBI) and the Monetary Authority of Singapore (MAS), as one of the world's least independent.

The MAS and Sama are not subject to statutory limits on lending to the government, and their policy formulation is not entirely independent of government. The RBI, for its part, receives low scores for (the absence of) restrictions on the appointment of the governor, independence of policy formulation and possession of an independent objective. The Federal Reserve is similarly not subject to statutory restrictions on its lending to the government.

The overall trend, however, is in the direction of greater independence. Six central banks – those of Iceland, Venezuela, Iraq, Lithuania, Macedonia and Norway – showed especially dramatic increases over the period. Argentina, Australia, Bulgaria and Georgia were exceptions to the trend.