Why is increased transparency in monetary and financial policies desirable?

Central bankers were once notorious for being inscrutable, as reflected in Alan Greenspan’s famous quip that “if you understood what I just said, you must not have heard me correctly.” Now, however, many central banks and financial agencies have begun to prize clarity in explaining their objectives and decisions to the public.

Monetary and financial policies can be made more effective if the public knows and understands the goals and instruments of policy, and if central banks and financial agencies make a credible commitment to meeting them. Good governance also calls for central banks and financial agencies to be accountable, particularly where these agencies are granted a high degree of autonomy. In cases when conflicts might arise between or within government units (e.g., if the central bank or a financial agency acts as both owner and financial supervisor of a financial institution, or if the responsibilities for monetary and foreign exchange policy are shared), transparency in the mandate and clear rules and procedures in the operations of the agencies can help in their resolution, strengthen governance, and facilitate policy consistency.

What are good practices on transparency in monetary and financial policies?

The IMF has developed a Code of Good Practices on Transparency in Monetary and Financial Policies for central banks and financial agencies. The Code was elaborated in cooperation with the Bank for International Settlements, and in consultation with a representative group of central banks, financial agencies, relevant international and regional organizations, and selected academic experts. It is premised on four broad principles:

• Clarity of roles, responsibilities, and objectives: The objectives of the central bank for monetary policy should be clearly defined, publicly disclosed, and written into law. The institutional relationship between monetary and fiscal policies should be clearly defined, as should any agency roles performed by the central bank on behalf of the government. For financial agencies, their objectives and institutional framework should be clearly defined, preferably in relevant legislation or regulation, and the role of oversight agencies with regard to payment systems should be publicly disclosed.
• Open process for formulating and reporting policy decisions: Central banks should publicly disclose and explain the framework, instruments, and targets, if any, that are used to achieve objectives. The structure of their decision-making bodies should be publicly disclosed and their decisions communicated in a timely manner. Periodic public statements should be made on progress toward achieving monetary policy objectives. The conduct of financial policies by financial agencies should be transparent and compatible with confidentiality considerations and the need to preserve effectiveness. Agencies should also issue periodic progress reports on the pursuance of policy objectives.
• Public availability of information on policies: For the central bank, information on monetary policy should be consistent with the IMF’s standards for data dissemination and its balance sheet should be publicly available. The central bank should establish and maintain public information services. Financial agencies should issue periodic public reports on major developments in the financial system, report aggregate data on a timely and regular basis, make texts of regulations and directives readily available to the public, and publicly disclose special protections, such as deposit insurance schemes and consumer protection arrangements.
• Accountability and assurances of integrity: Central bank officials should periodically appear before a designated public authority to explain the conduct, performance, and outlook of their policy. The central bank should provide assurances of the integrity of operations and officials through the release of audited financial statements of its operations and the standards of conduct for its officials. The Code suggests similar practices to hold officials of financial agencies accountable for their actions.

How is the Code of Good Practices on Transparency in Monetary and Financial Policies implemented?

The IMF has issued a Supporting Document to guide countries in implementing the principles described in the Code. This document provides a fuller description of each of the transparency practices and their rationale, as well as examples of applications by central banks and financial agencies.

How is transparency in monetary and financial policies assessed?

As a first step towards implementing the Code, the IMF encourages country authorities to participate in a detailed assessment of transparency of monetary and financial policies in the context of their participation in the Financial Sector Assessment Program (FSAP), a voluntary comprehensive evaluation of a country’s financial systems. An FSAP evaluation entails detailed principle-by-principle assessments—which give rise to Reports on the Observance of Standards and Codes (ROSCs)—capped by a summary report. The latter includes a staff commentary indicating prioritized recommendations for improved observance.

As of March 2013, 88 countries had completed an assessment of transparency in either monetary policies, financial policies, or both in the context of an FSAP (10 did an FSAP update, partial update or a standalone ROSC). The total number of transparency assessments in both monetary and financial policies is 346. To date, 57 country ROSCs have been published on the IMF website (publication is voluntary).