Central Bank Structure, Policy Efficiency, and Macroeconomic Performance: Exploring Empirical Relationships

A ll economists agree that more information is better than less. When people are better informed, they make better decisions, enhancing the efficiency of the economy in allocating resources and improving overall welfare. It would be difficult to find an area of economic life where this line of argument has carried more weight than it has in central banking circles in recent years. The job of central bankers is to conduct monetary policy in order to promote price stability, sustainable growth, and a stable financial system. They do this in an environment fraught with unavoidable uncertainties. But in conducting policy, there is one uncertainty that policymakers can reduce: the uncertainty they themselves create. Everyone agrees that monetary policymakers should do their best to minimize the noise their actions add to the environment. The essence of good, transparent policy is that the economy and the markets respond to the data, not to the policymakers. The result of this agreement is that today we have the nearly universal and immediate public broadcast of all interest rate changes. As everyone in financial markets around the world knows, the Federal Reserve’s Federal Open Market Committee (FOMC) makes a public statement at 2:15 p.m. EST following each meeting. But the first public announcement of a move in the federal funds rate target was made on February 4, 1994, and the regular issuance of a statement became an official feature of the FOMC’s procedures only on January 19, 2000. Before that, it was customary for FOMC policy changes to be communicated to market participants through actions rather than words. There are still people who argue for the efficacy of central bank secrecy in various forms, claiming that surprises are more effective and that even accurate information can be misinterpreted, resulting in undesirable financial market volatility. We think that it is fair to say that these arguments have not been persuasive and that the advocates of policy transparency have won the day. We have been reduced to arguments about the mechanics and exact timing of the release of information. Should the minutes of a meeting be released as soon as physically possible following the meeting, as done by the Bank of England’s Monetary Policy Committee; or should there be a modest delay until just after the following meeting, which is the FOMC’s practice; or is it acceptable to wait for years, as the European Central Bank is planning to do? Is it necessary or advisable for the head of the interest rate–setting body to hold regularly scheduled news conferences? Should the policymakers be required to appear before legislative bodies to provide descriptions of their decisionmaking processes and justifications for their actions? How public should the inputs— forecasts, models, and anecdotes—into interest rate decisions be? All of these questions concern minor issues about the availability of information. As for general principles, we have now progressed to the point where on September 26, 1999, the Interim Committee of the Board of Governors of the International Monetary Fund issued the Code of Good Practices on Transparency in Monetary and Financial Policies: Declaration and Principles (which we will refer to as the IMF Code). As in the case of other standards and codes promulgated under the auspices of the IMF,1 the expectation is that they will be adhered to by all of the countries in the world. We take the statements in the IMF Code to represent a rough version of the consensus on the value of monetary policy transparency. Paragraph 4 of the IMF Code states: