## ANNEX I. METHODOLOGY: THE IAPOC INDEX

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### I. Caucasus and Central Asia Context — credibility, inflation, and inflation targeting
- CCA central banks (CBs) face credibility challenges that can influence their ability to anchor expectations and hinder monetary policy transmission.
- Gaps exist between inflation expectations and targets (Figure 1 Panel A).
- Dollarization: FX deposits ranged 37-59 percent in CCA for 2021.
- Transition to inflation targeting (IT):
  - As of 2021, all CCA countries, except Azerbaijan and Tajikistan, have announced IT regimes.
  - Transition start years: Armenia in 2006, Georgia in 2009, Kyrgyz Republic in 2014, Kazakhstan in late 2015, Uzbekistan in 2020.
  - Armenia pioneered the shift in 2006.
- Progress: CCA CBs that adopted IT regimes improved modeling, forecasting, monetary operations, and communications; earlier adopters (Armenia, Georgia, Kyrgyz Republic) achieved larger reductions in inflation (Figure 1 panel B).
- Many CCA countries remain in transition toward fully-fledged IT consistent with Laurens and others (2015).

### II. Role of monetary policy framework (MPF) and communication
- MPF definition: “the structures in place that enable and guide the conduct of monetary policy. This encompasses both the legal basis—which shapes independence and accountability—and the design, implementation, and communication practices of monetary policy.” (Unsal, Papageorgiou, and Garbers, 2022).
- Key functions of a sound MPF:
  - Improve monetary policy transmission.
  - Manage shocks more effectively.
  - Increase predictability and credibility via transparency and clearer communication (Blinder and others, 2008).
- Communication benefits:
  - Reduces uncertainty about the economic outlook.
  - Signals a conditional interest rate path, helping market rates incorporate policy information (IMF, 2018).
- Challenges limiting communication effectiveness in CCA:
  - Shallow financial markets and limited interbank markets impair price discovery and timely incorporation of CB information.
  - Low financial literacy and population mistrust reduce influence of CB communication.
    - Georgian mean score for “Student performance in financial literacy”: 403; OECD average: 505 (PISA).
    - Percent of adults financially literate: 18 percent (Armenia), 35 percent (Azerbaijan), 30 percent (Georgia), 40 percent (Kazakhstan), 19 percent (Kyrgyz Republic), 17 percent (Tajikistan), 21 percent (Uzbekistan) (Klapper and others, 2020).
    - OECD “Trust in government” category: percentage answering “Not very much” or “None at all” in CCA countries is between 66.8 percent and 22.7 percent (49 percent is the OECD average).

### III. Purpose and scope of the paper
- Objectives:
  - Document the state of CBs’ monetary policy frameworks in CCA, with emphasis on communication.
  - Analyze how these frameworks are evolving.
- Focus: Document improvements in MPFs, transparency, and communication; examine main features of monetary policy press releases.

### IV. Assessing MPFs in CCA — IAPOC index overview and results
- IAPOC index covers three pillars:
  - Pillar 1: Independence and Accountability
  - Pillar 2: Policy and Operational Strategy
  - Pillar 3: Communications
- Index scale: 0-1.
- Analysis sample: four CCA countries—Armenia, Georgia, Kazakhstan, Kyrgyz Republic—due to data availability.
- IAPOC 2020 findings:
  - Indexes for 2020 registered sizable improvements compared to early stages of IT regimes (Figure 2).
  - Room for improvement remains, especially in Independence and Accountability, and Communications (Figure 3).
- Index properties: Index ranges 0 to 1 (0 minimum, 1 maximum).
- Developing-economies comparator list preserved as in source.

### V. Pillar 1 — Independence and Accountability: de jure features and gaps
- De jure features:
  - Most CCA CBs have price stability as the main objective and powers to implement monetary policy, including full control over policy tools and ability to set their own targets.
  - Monetary policy decisions typically assigned to a committee within the CB or its executive board.
- Table 1 (2022 highlights for ARM GEO KGZ KAZ UZB TJK AZE):
  - Primary mandate of price stability: √ for ARM, GEO, KGZ, KAZ, UZB, TJK, AZE.
  - Chairman tenure longer than government²: √ for ARM, GEO, KGZ, KAZ; blank for UZB, TJK, AZE.
  - Board members tenure longer than government²: √ for ARM, GEO, KGZ; blank for others.
  - Independent members to total number of board members² ³:
    - ARM: 5 of 8
    - GEO: 5of 9
    - KGZ: 0 of     7
    - KAZ: 0 of  9
    - UZB: 2 of  9
    - TJK: 0 of 7
    - AZE: 2 of 7
  - Chairman appointment:
    - ARM: Parliament
    - GEO: Parliament based on presidential¹ recommendation
    - KGZ: Parliament based on presidential recommendation
    - KAZ: President with the consent of the Senate.
    - UZB: Parliament based on presidential nomination
    - TJK: Parliament based on presidential nomination
    - AZE: Parliament based on presidential nomination
  - Monetary Policy Committee / Board formats vary by country.
  - Of which independent members² ³:
    - ARM: 5 of 8
    - GEO: 0 of 13
    - KGZ: 0 of 7
    - KAZ: 0 of 9
    - UZB: 2 of 9
    - TJK: 0 of 10
    - AZE: 2 of 7
  - Government financing — Not permitted: √ for GEO, KGZ, KAZ, UZB, TJK; Azerbaijan: “With limitations”.
  - Accountability — Formal report to parliament: √ for ARM, GEO, UZB, TJK.
- Sources: IMF staff based on central banks’ laws, and Unsal and others (2022).
- Footnotes preserved:
  - ¹ President of Georgia is a ceremonial position. Prime minister is the head of the government.
  - ² Information drawn from MPF assessments based on Unsal and others (2022) and central banks’ laws.
  - ³ Independent board members defined excluding central bank staff with management responsibilities, government officials, and board members whose appointment depends entirely on the chairman and the executive government.
  - 16: The number board members increased from 7 to 9 by the amendment from Jun 25, 2020, law no. 6492-RS, the law was effective upon publication i.e., on July 2, 2020.

### VI. De facto independence risks and governance issues
- De jure independence exists, but de facto independence can be compromised through:
  - Government influence over CB governors:
    - Governors are nominated and dismissed by the head of government and approved by parliament, limiting de facto protection due to weak parliamentary checks.
    - Judiciary systems provide limited protection for governors to appeal dismissals; courts rarely rule against government initiatives.
    - Tenure safeguards weaken when the head of government remains in office for multiple terms.
  - Composition of monetary policy committees:
    - Committees often lack independent members and are composed primarily of CB officials who answer to the governor, giving the governor significant influence.
    - Shortage of experts drives a trade-off between limited human capital and safeguarding independence.
  - Governance issues related to board members:
    - Most CCA CBs have limited independent board members.
    - Board members’ terms are, in practice, shorter or equal to the government term except in Armenia, Georgia, Kyrgyz Republic.
    - Deputy governors’ roles can be undermined as they are appointed and dismissed based on the CB governor’s recommendation.
- These issues can undermine independence, trust, and credibility of monetary policy.

### VII. Financial independence and restrictions
- Financial independence features:
  - In most CCA countries, CB financing to the government is prohibited.
  - Only Azerbaijan and Tajikistan allow narrow advances from the CB to the government within legal limits.
  - CCA CBs are not allowed to participate in primary government bond auctions; they can buy government bonds in the secondary market for monetary policy purposes.
  - Most CBs have clear rules to distribute profits, set up reserve funds, and require government recapitalization if CB capital falls below the minimum.

---

### Accountability mechanisms: current status and gaps
- Most countries report de facto to the parliament (except Kazakhstan and Azerbaijan) on general central bank activities.
- Most countries publish CBs’ audited financial statements (except Uzbekistan).
- Accountability mechanisms are stronger where parliament has a more prominent role: Armenia, Georgia, Kyrgyz Republic.
- The role of external audit committees is limited.
- External evaluations of monetary policy performance or governor’s term have not been published.

### Pillar 2: Policy and Operational Strategy — progress and remaining issues
- Progress:
  - Policy and Operational Strategy has significantly improved.
  - The four CCA countries assessed by Unsal and others (2022) have developed monetary policy instruments and clearly set the policy interest rate as their main tool with price stability as objective.
  - These CBs reduced policy rate corridors over time; some reduced volatility of interbank interest rates.
  - Armenia and Georgia reduced volatility of market interest rates around the policy rate substantially; others still working to curb interest rate volatility.
- Remaining improvements needed:
  - Incorporate future risks and contingency plans in policy formulation.

### Interbank market evidence
- Figure 4 panels show interbank market rates for Armenia, Georgia, Kyrgyz Republic, Kazakhstan, Uzbekistan, Azerbaijan.
- Source notes:
  - Corridors data at daily frequency; interbank rates at highest frequency available.
  - Latest data as: December 30, 2022 for Azerbaijan, Georgia, Kazakhstan, Kyrgyz Republic, Uzbekistan; and Sepember 30, 2022 for Armenia.

### FX intervention policy clarity
- Policy rates have been the main tool; CBs less clear on FX intervention policy.
- Several CBs are vague on FX intervention strategy; intervention details not always disclosed despite significant exchange rate transmission (Poghosyan, 2020).
- Disclosure practices:
  - Kyrgyz Republic and Georgia release daily data on FX interventions, often with lag.
  - Other CCA CBs report only monthly aggregated information.
- Potential reasons for limited disclosure:
  - Public perceives exchange rate as key anchor for prices, especially in more fixed FX regimes.
  - CBs may avoid disclosure that can be misinterpreted and destabilize FX markets when de jure and de facto regimes do not coincide (e.g., “fear of floating”).
- Transition dynamics from peg to IT can resemble “inflation targeting lite”.

### Policy recommendations to strengthen independence and strategy
- Improve de facto Independence and Accountability and refine Policy and Operational strategies by:
  - Strengthening safeguards against political interference.
  - Improving checks and balances within the CB.
  - Appointing more independent members to the monetary policy formulating body.
- Two near-term actionable steps:
  1. Upgrade legislation to best practices, in particular:
     - enhancing the skills requirements for the monetary policy formulating body including the governor;
     - tightening the dismissal requirements.
  2. CBs should highlight the role of independence in their communications to help internalize the message among government, politicians, and the public.
- For CBs that intervene in the FX market:
  - Provide ex-ante explanation of such actions, including their relationship with the main tool and how they are balanced, within Policy and Operational Strategies.

### III. Zooming into Communication and Transparency in CCA — Pillar 3: Communications
- Communication goal under IT: persuade economic agents that policy formulation and implementation are oriented to achieve the inflation target.
- Effective communication anchors inflation expectations and enhances predictability of monetary policy.
- Quotation: Blinder (2009) — “successful central bank communication efforts should make policy more predictable and market expectations about future short-term rates more accurate”.

### IAPOC Index — Communications pillar findings
- Communications pillar: CCA countries generally in line with developing economies.
- Kyrgyz Republic receives the lowest score; Georgia the highest (Figure 5).
- Areas for improvement:
  - Disclose forecasts and inflation expectations surveys.
  - Ensure timely release of press conferences on CBs’ websites.
  - Provide more comprehensive explanation of policy stance and articulate likely future path.

### Communications vehicles and practices
- Standard vehicles: monetary policy reports, press releases and conferences, social media.
- Most CBs have a monetary policy strategy document explaining objectives and tools.
- Press releases: communicate decisions on interest rates; monetary policy reports disclose inflation and activity forecasts.
- Survey (Box 1, June 2021, JVI-IMF) highlights:
  - CBs ranked monetary policy reports and press releases highest; social media lower.
  - CB officials unanimously assessed CB communication has an impact (either low or high) on interest rates, inflation expectations, exchange rate.
  - 4 out of 6 CBs consider impact on inflation expectations is high.
  - 5 out of 6 CBs consider impact on retail interest rates is low.

### Press releases: length, readability, and content focus
- Time window: January 2006 to December 2021.
- Recommendations for press releases (Unsal and others, 2022):
  i) explain the economic conjuncture;
  ii) outline risks to objectives and targets;
  iii) explain monetary policy decisions and how they help achieve CB goals;
  iv) state monetary policy stance and its future path.
- Observed improvements:
  - Length of press releases increased over the last decade, stepped up around IT transition start and trended upward.
  - During uncertainty (e.g., COVID-19 in 2020; Georgia in 2008 and 2015) press releases expanded.
- Readability:
  - Flesch readability index shows irregular patterns; no evident improvements in readability.
  - COVID-19 in 2020 showed deteriorations in clarity indexes across most countries.
  - Trade-off: more uncertainty leads to longer, more complex explanations, reducing clarity.
  - Flesch formula: RE = 206.835 – (1.015 x ASL) – (84.6 x ASW).
- Caveat: Readability measures are partial approximations and may not capture multilingual publication efforts.

### Press release topical focus (word-frequency findings)
- Most frequent terms: “inflation” and “price”.
- Frequent connections: inflation with monetary policy (“monetary”, “rate”) and financial market terms (“bank”, “deposit”, “loan”).
- Growth discussed notably in Georgia, Kazakhstan, Uzbekistan (“growth” among top 10 terms).
- Forward-looking terms such as “expect” or “forecast” appear, consistent with forward-looking IT regimes.

### Topic coverage, similarity, and tone
- Topic coverage:
  - Strong emphasis on current economic conjuncture.
  - Extensive details can reduce clarity about monetary policy decisions.
  - Substantial focus on food inflation and global oil context; other monetary-policy-relevant issues sometimes omitted.
  - Most CBs explain reasons for decisions and risks with short-term outlook, but press releases rarely:
    - cite numerical inflation targets,
    - state the monetary stance,
    - suggest direction of conditional future policy.
- Text similarity:
  - Press releases highly similar to previous releases; recent releases over 50 percent similar in word choice and frequency.
  - Armenia and Georgia consistently highly similar to prior releases.
  - High dissimilarity can surprise markets and affect macro outcomes (Ehrmann and Talmi, 2020).
- Tone:
  - Press releases mostly negative in tone.
  - Except Azerbaijan, selected CCA countries’ releases contain more negative than positive words, yielding negative sentiment scores.
  - Sentiment measured using Loughran and McDonald (2011) dictionary.
  - Tone affects macroeconomic outcomes (Schmeling and Wagner, 2019; Neuhierl and Weber, 2019).
- Example metrics:
  - Panel A. Average Similarity time series 2008–2022 for ARMAZEGEOKAZUZBKGZ.
  - Panel B. Average Sentiment time series 2008–2022 for ARMAZEGEOKAZUZBKGZ.

### Transparency trends and indexes
- Transparency role: increases understanding of CB objectives and decisions, accountability, framework credibility, and predictability of monetary policy.
- IAPOC findings:
  - Transparency increased in CCA; overall IAPOC-transparency index rose significantly up to 2016 triggered by IT transitions.
  - Improvements reflected Policy and Operational Strategy enhancements (e.g., stating numerical targets) and Communications (e.g., disclosing monetary policy decisions).
  - Average IAPOC-transparency index slightly deteriorated in 2018 due to not fully motivating and communicating MPF changes in some cases.
  - Panel A: IAPOC-transparency and its Pillars ranges shown 0.4 to 1.0 for years 2010, 2013, 2016, 2018, 2020.
  - Panel B: IAPOC-transparency, 2010-2020, country comparison ARM, GEO, KAZ, Kyrgyz Republic* with values across 2010 and 2020. Note: Kyrgyz Republic first assessment available is for 2016.
- Dincer and Eichengreen index:
  - Also indicates transparency increased in CCA in line with global trends.
  - Shows significant increases via improvements in disclosing policy decisions and their motivation.
- Broader trend (Dincer, Eichengreen and Geraats, 2022):
  - Panel A. Central Bank Transparency Trends (Index 0-15) time series 1998–2020 for Advanced economies, Emerging Europe, Emerging Europe IT, CCA.
  - Panel B. Central Bank Transparency in CCA (Index 0-15) values for ARM, GEO, KAZ, KGZ, AZE, UZB, TJK, CCA, Emerging Europe IT for 1998, 2013, 2020 (or latest available*).
  - Note: Emerging Europe IT corresponds to 2019.
- Exceptional circumstances:
  - Deviations from high transparency may be acceptable in exceptional circumstances (e.g., crisis) but must be balanced against maintaining public trust.

### Conclusions and policy recommendations
- Main conclusion:
  - CCA countries have progressed in upgrading monetary policy frameworks at different stages of transition.
  - Gaps remain in communications vis-à-vis international best practices.
  - Low trust in state institutions and low financial literacy constrain communication effectiveness; additional time needed to refine frameworks.
- Institutional design recommendations:
  - Strengthen safeguards for CB Independence and Accountability by including more independent board members in executive boards and monetary policy committees.
  - Emphasize role of independence in public communications to raise awareness among politicians and government officials.
- Policy and Operational Strategy recommendations:
  - Enhance transparency regarding monetary operations and FX intervention strategies.
  - Improve data availability to better understand policy responses, strengthen transmission mechanism, and enhance credibility.
  - Provide timely and comprehensive information on monetary operations and foreign exchange interventions; currently practiced by only a few CCA CBs.
- Communications recommendations:
  - Continue progress and pursue further transparency and consistency gains.
  - Clear communication is essential to enhance pass-through of interest rates and anchor inflation expectations.
  - Streamline press releases and explicitly state monetary policy stance, including numerical inflation targets, to better anchor expectations.

### Methodology notes (Annexes)
- IAPOC index:
  - Developed by Unsal and others (2022) characterizing MPFs across 50 countries over time.
  - Consists of three pillars: Independence and Accountability (I and A), Policy and Operational Strategy (P and O), Communications (C).
  - Uses 225 criteria assessed from central banks’ laws and websites.
  - Each criterion scored 0 or 1 (0.5 for rare cases); criteria aggregated as unweighted averages across five sub-pillars; pillars are averages of sub-pillars; IAPOC index is average of three pillars.
- Press releases content coding (Annex II):
  - For 2020-21 press releases, binary coding (1 or 0) assigned per feature if observed.
  - Features: Reasons for the decision; Monetary policy stance; Current state of the economy; Short term outlook; Risks; Direction of future monetary policy; Mentioning numerical target.
  - Example: For Armenia only 60 percent of the press releases mention the numerical targets in the press release.
  - Feature assignment examples preserved as in source (including example wording and coding rules).

*Source: Monetary Policy Frameworks and Communication in the Caucasus and Central Asia, Working Paper No. WP/2023/251 (excerpts: ANNEX I and related sections).*

### ANNEX I. METHODOLOGY: THE IAPOC INDEX ___________________________________________________ 22

### ANNEX I. METHODOLOGY: THE IAPOC INDEX

### I. Caucasus and Central Asia Context — credibility, inflation, and inflation targeting
- Several Caucasus and Central Asia (CCA) central banks (CBs) still face credibility challenges that can influence their ability to anchor expectations and hinder monetary policy transmission.
- CCA CBs exhibit significant gaps between inflation expectations and their targets (Figure 1 Panel A).
- Dollarization measured by FX deposits ranged 37-59 percent in CCA for 2021.
- Transition to inflation targeting (IT):
  - As of 2021, all CCA countries, except Azerbaijan and Tajikistan, have announced IT regimes.
  - Countries started the transition into IT regimes in the following years: Armenia in 2006, Georgia in 2009, and Kyrgyz Republic in 2014, Kazakhstan in late 2015, and Uzbekistan in 2020.
  - Armenia pioneered this shift in 2006.
- CCA CBs that adopted IT regimes have made notable progress in modeling and forecasting, monetary operations, and communications, with earlier adopters (Armenia, Georgia, and Kyrgyz Republic) achieving larger reductions in inflation (Figure 1 panel B).
- Many CCA countries remain in transition to a fully-fledged IT consistent with the general idea of transition noted in Laurens and others (2015).

### II. Role of monetary policy framework (MPF) and communication
- Definition used: MPF = “the structures in place that enable and guide the conduct of monetary policy. This encompasses both the legal basis—which shapes independence and accountability—and the design, implementation, and communication practices of monetary policy.” (Unsal, Papageorgiou, and Garbers, 2022).
- Key functions of a sound MPF:
  - Improve monetary policy transmission.
  - Manage shocks more effectively.
  - Increase monetary policy predictability and credibility through enhanced transparency and clearer communication (Blinder and others, 2008).
- Communication reduces uncertainty regarding the economic outlook and signals a conditional path of interest rates, helping market interest rates incorporate policy information and facilitating management of policy trade-offs (IMF, 2018).
- Challenges limiting communication effectiveness in CCA:
  - Shallow financial markets and limited interbank markets hinder price discovery and the timely incorporation of CB information.
  - Low financial literacy and population mistrust of official institutions can reduce the influence of CB communication on households and firms. Specific data:
    - Georgian mean score for “Student performance in financial literacy” is 403 while OECD countries scored 505 on average (PISA).
    - Percent of adults who are financially literate: 18 percent in Armenia, 35 percent in Azerbaijan, 30 percent in Georgia, 40 percent in Kazakhstan, 19 percent in Kyrgyz Republic, 17 percent in Tajikistan, and 21 percent in Uzbekistan (Klapper and others, 2020).
    - OECD “Trust in government” category: percentage answering “Not very much” or “None at all” in CCA countries is between 66.8 percent and 22.7 percent (49 percent is the OECD average).

### III. Purpose and scope of the paper
- Objectives:
  - Document the state of CBs’ monetary policy frameworks in CCA, with emphasis on communication.
  - Analyze how these frameworks are evolving.
- Focus: Document improvements in MPFs, transparency, and communication; examine main features of monetary policy press releases.

### IV. Assessing MPFs in CCA — IAPOC index overview and results
- The IAPOC index (Index of Independence and Accountability, Policy and Operational Strategy, and Communications) developed by Unsal and others (2022) covers three pillars:
  - Pillar 1: Independence and Accountability
  - Pillar 2: Policy and Operational Strategy
  - Pillar 3: Communications
- The index scores between 0-1.
- Analysis focused on four CCA countries—Armenia, Georgia, Kazakhstan, and the Kyrgyz Republic—due to data availability.
- IAPOC 2020 findings:
  - Indexes for 2020 registered sizable improvements compared to early stages of IT regimes (Figure 2).
  - There remains room for improvements especially in Independence and Accountability, and Communications (Figure 3).
- Index properties explicitly noted:
  - (Index ranges 0 to 1: 0 (minimum), 1 (maximum))
  - Developing economies comparator includes: Argentina, Brazil, Chile, China, Colombia, Ghana, India, Indonesia, Kenya, Malawi, Malaysia, Mozambique, Mexico, Nigeria, Pakistan, Philippines, Poland, Rwanda, Serbia, South Africa, Tanzania, Turkey, Uganda, Ukraine, and Zambia.

### V. Pillar 1 — Independence and Accountability: de jure features and gaps
- Most CCA CBs have price stability as the main objective and possess powers to implement monetary policy, including full control over policy tools and ability to set their own targets.
- Monetary policy decisions are typically assigned to a committee within the CB or its executive board, as specified by laws and regulations.
- Table 1 highlights main de jure features for 2022 across ARM GEO KGZ KAZ UZB TJK AZE:
  - Primary mandate of price stability: √ for all listed countries (ARM, GEO, KGZ, KAZ, UZB, TJK, AZE).
  - Chairman tenure longer than government²: √ for ARM, GEO, KGZ, KAZ; blank for UZB, TJK, AZE.
  - Board members tenure longer than government²: √ for ARM, GEO, KGZ; blank for others.
  - Independent members to total number of board members² ³: 5 of 8 (ARM); 5of 9 (GEO); 0 of     7 (KGZ); 0 of  9 (KAZ); 2 of  9 (UZB); 0 of 7 (TJK); 2 of 7 (AZE).
  - Chairman appointment: Parliament (ARM); Parliament based on presidential¹ recommendation (GEO); Parliament based on presidential recommendation (KGZ); President with the consent of the Senate. (KAZ); Parliament based on presidential nomination (UZB); Parliament based on presidential nomination (TJK); Parliament based on presidential nomination (AZE).
  - Monetary Policy Committee  / Board Committee / Board Committee / Board Committee / Board (varies by country).
  - Of which independent members² ³: 5 of 8 (ARM); 0 of 13 (GEO); 0 of 7 (KGZ); 0 of 9 (KAZ); 2 of 9 (UZB); 0 of 10 (TJK); 2 of 7 (AZE).
  - Government financing — Not permitted: √ for GEO, KGZ, KAZ, UZB, TJK; Azerbaijan shows “With limitations”.
  - Accountability — Formal report to parliament: √ for ARM, GEO, UZB, TJK.
- Sources for Table 1: IMF staff based on central banks’ laws, and Unsal and others (2022).
- Footnotes and methodological notes preserved:
  - ¹ President of Georgia is a ceremonial position. Prime minister is the head of the government.
  - ² Information drawn from MPF assessments based on Unsal and others (2022) and central banks’ laws.
  - ³ Independent board members defined excluding central bank staff with management responsibilities, government officials, and board members whose appointment depends entirely on the chairman and the executive government.
  - 16: The number board members increased from 7 to 9 by the amendment from Jun 25, 2020, law no. 6492-RS, the law was effective upon publication i.e., on July 2, 2020.

### VI. De facto independence risks and governance issues
- De jure independence exists, but de facto independence can be compromised through:
  a. Government influence over CB governors:
    - In most CCA countries, the CB governor is nominated and dismissed by the head of government (president or prime minister) and approved by the parliament — ensuring independence on paper but limited in practice due to weak parliamentary checks.
    - Judiciary systems provide limited protection for governors to appeal dismissals; courts rarely rule against government initiatives.
    - Tenure safeguards become less effective when the head of government remains in office for multiple terms.
  b. Composition of monetary policy committees:
    - In several CCA countries, the monetary policy formulating body typically lacks independent members.
    - Committees often consist primarily of CB officials who answer to the governor, giving the governor significant influence.
    - These arrangements are partly driven by shortages of experts — a trade-off between limited human capital and safeguarding independence.
  c. Governance issues related to board members:
    - Majority of CCA CBs have a limited number of independent board members.
    - Board members’ term is, in practice, shorter or equal to the government term except in Armenia, Georgia, and Kyrgyz Republic.
    - Deputy governors’ roles can be undermined as they are appointed and dismissed based on the CB governor’s recommendation.
- These issues can undermine independence, trust, and therefore credibility of monetary policy.

### VII. Financial independence and restrictions
- CCA CBs are granted financial independence:
  - In most CCA countries, CB financing to the government is prohibited.
  - Only Azerbaijan and Tajikistan allow narrow advances from the CB to the government within legal limits.
  - CCA CBs are not allowed to participate in primary government bond auctions, while they can buy government bonds in the secondary market for monetary policy purposes.
  - Most CBs have clear rules to distribute profits, set up reserve funds, and require the government to recapitalize the CBs if their capital falls below the minimum capital.

*Source: wpiea2023251-print-pdf - ANNEX I. METHODOLOGY: THE IAPOC INDEX — International Monetary Fund*

### 11.   Accountability mechanisms are at an early stage in the region. Most of the countries report de facto to

### wpiea2023251-print-pdf - 11.   Accountability mechanisms are at an early stage in the region. Most of the countries report de facto to

### Accountability mechanisms: current status and gaps
- Most countries report de facto to the parliament (except Kazakhstan and Azerbaijan) on general central banks activities.
- Most countries publish CBs’ audited financial statements (except Uzbekistan).
- Accountability mechanisms are stronger where parliament has a more prominent role: Armenia, Georgia, and Kyrgyz Republic.
- The role of external audit committees is limited.
- External evaluations of the monetary policy performance or governor’s term have not been published.

### Pillar 2: Policy and Operational Strategy — progress and remaining issues
- Policy and Operational Strategy has significantly improved.
- The four CCA countries assessed by Unsal and others (2022) have:
  - developed their monetary policy instruments;
  - clearly set the policy interest rate as their main tool with price stability as objective.
- These CBs have reduced their policy rates corridors over time and some have been able to reduce the volatility of the interbank interest rates.
- Armenia and Georgia have reduced the volatility of market interest rates around the policy rate substantially; others are still working to curb interest rate volatility, suggesting the countries are still in transition to a full-fledged IT.
- Other aspects still require further improvements, notably:
  - considering future risks and contingency plans in formulating monetary policy.

### Interbank market evidence (figure summary)
- Figure 4 shows interbank market rates panels for:
  - Panel A: Armenia (Percent)
  - Panel B: Georgia (Percent)
  - Panel C: Kyrgyz Republic (Percent)
  - Panel D: Kazakhstan (Percent)
  - Panel E: Uzbekistan (Percent)
  - Panel F: Azerbaijan (Percent)
- Source notes:
  - Corridors data are at daily frequency, and interbank rates are at the highest frequency available.
  - Latest data as: December 30, 2022 for Azerbaijan, Georgia, Kazakhstan, Kyrgyz Republic, and Uzbekistan; and Sepember 30, 2022 for Armenia.

### FX intervention policy clarity
- Policy rates have been the main monetary policy tool, but CBs have been less clear regarding the role of FX intervention policy.
- Several CBs are vague or not always clear on their FX intervention strategy; details on interventions are not disclosed every time despite the significant exchange rate transmission channel (Poghosyan, 2020).
- Disclosure practices:
  - Kyrgyz Republic and Georgia release daily data on FX interventions, often with lag.
  - Other CCA CBs report only monthly aggregated information.
- Potential reasons for limited disclosure:
  - Population may perceive the exchange rate as a key anchor for prices, especially in more fixed FX regimes.
  - CBs might avoid disclosing information that can be misinterpreted and destabilize the FX market, particularly when de jure and de facto regimes do not coincide (e.g., “fear of floating”).
- Contextual note:
  - Transition dynamics from a peg to IT can resemble “inflation targeting lite”.

### Policy recommendations to strengthen independence and strategy
- Improve de facto Independence and Accountability and refine Policy and Operational strategies by:
  - Strengthening safeguards against political interference.
  - Improving checks and balances within the CB.
  - Appointing more independent members to the monetary policy formulating body.
- Two near-term actionable steps:
  1. Upgrade legislation to best practices, in particular:
     - enhancing the skills requirements for the monetary policy formulating body including the governor;
     - tightening the dismissal requirements.
  2. CBs should highlight the role of independence in their communications to help internalize the message among government, politicians, and the public.
- For CBs that intervene in the FX market:
  - Provide ex-ante explanation of such actions, including their relationship with the main tool and how they are balanced, within Policy and Operational Strategies.

### III. Zooming into Communication and Transparency in CCA — Pillar 3: Communications
- Effective communication anchors inflation expectations and enhances predictability of monetary policy.
- Within IT, communication goal: persuade economic agents that policy formulation and implementation are oriented to achieve the inflation target.
- Quotation referenced: Blinder (2009) — “successful central bank communication efforts should make policy more predictable and market expectations about future short-term rates more accurate”.

### IAPOC Index — Communications pillar findings
- The IAPOC Index shows in its Communications pillar that CCA countries are generally in line with those of developing economies.
- Kyrgyz Republic receives the lowest score; Georgia exhibits the highest one (Figure 5).
- Areas needing improvement:
  - greater emphasis on disclosing forecasts and inflation expectations surveys;
  - ensuring timely release of press conferences on CBs’ websites;
  - providing a more comprehensive explanation of the policy stance and articulating the likely future path.

### Communications vehicles and practices (Table 2 summary)
- CCA CBs use standard vehicles: monetary policy reports, press releases and conferences, social media.
- Most CBs have a monetary policy strategy document explaining objectives and tools.
- Press releases communicate decisions on interest rates; monetary policy reports disclose inflation and activity forecasts.
- A survey of CCA CBs (Box 1) indicates:
  - CBs view press releases and monetary policy reports as main communication vehicles.
  - More advanced transition countries (Armenia and Georgia) use monetary policy reports as main vehicle; earlier transition countries use press releases.

### Box 1: Views from CCA Central Bankers (survey highlights)
- Survey (June 2021, JVI-IMF):
  - CBs ranked monetary policy reports and press releases at the top; social media posting ranked lower.
  - CB officials unanimously assessed CB communication has an impact (either low or high) on interest rates, inflation expectations, and exchange rate.
  - Distribution of impact (high vs low) varied across CBs.
  - Two notable survey outcomes:
    - 4 out of 6 CBs consider the impact of communication on inflation expectations is high.
    - 5 out of 6 CBs consider that the impact of communication on retail interest rates is low.

### Press releases: length, readability, and content focus
- Press releases have been upgraded across the region; analysis covers January 2006 to December 2021.
- Unsal and others (2022) recommend press releases communicate:
  i) the economic conjuncture;
  ii) the risks to outlook for objectives and target;
  iii) the explanation of monetary policy decisions and how they help achieve the CB’s goals;
  iv) the monetary policy stance and its future path.
- Observed improvements:
  - CCA CBs increased the length of press releases in the last decade; number of words stepped up around the time the CBs started the transition to IT and trended upward.
  - During periods of uncertainty press releases expanded (e.g., COVID-19 pandemic in 2020; Georgia in 2008 and 2015).
  - CBs aimed to provide more information and context.
- Readability findings:
  - Clarity indicators measured by the Flesch readability index show irregular patterns; no evident improvements in readability.
  - COVID-19 in 2020 presented deteriorations in clarity indexes across most countries.
  - Trade-off noted: more uncertainty leads CBs to explain more, using more complex language and reducing clarity.
  - Readability (Flesch) index formula provided: RE = 206.835 – (1.015 x ASL) – (84.6 x ASW).
- Caution:
  - Readability measures are partial approximations; they may not reflect CBs’ efforts such as publishing releases in multiple languages.

### Press release topical focus (word-frequency findings)
- Word cloud analysis indicates:
  - “inflation” and “price” are the most frequently mentioned terms in most CCA countries’ press releases.
  - Discussion often connects inflation with monetary policy (“monetary”, “rate”) and financial market terms (“bank”, “deposit”, “loan”).
  - Growth is discussed notably in Georgia, Kazakhstan, and Uzbekistan (“growth” among top 10 terms).
  - Forward-looking terms such as “expect” or “forecast” appear, consistent with forward-looking IT regimes.

*Source: Excerpts from IMF staff analysis in wpiea2023251-print-pdf (sections on Accountability, Pillar 2: Policy and Operational Strategy, and Pillar 3: Communications).*

### 22.   Further analysis on topic coverage reveals strong emphasis on economic conjuncture and rooms

### 22.   Further analysis on topic coverage reveals strong emphasis on economic conjuncture and rooms to discuss inflation target more

### Topic coverage in press releases
- CCA CBs’ press releases have strong emphasis on the current economic conjuncture.
- Including many other details can reduce clarity of the overall texts and, more specifically, on the explanation of monetary policy decisions.
- Some CCA CBs devote substantial portion of their texts to explain the contribution of food inflation and the global oil context but miss discussing other key issues related to monetary policy.
- Most CBs explain the reasons of the monetary policy decisions and risks, with some sense of short-term outlook.
- Press releases’ content scarcely:
  - cites their numerical inflation targets — which helps to anchor expectations,
  - states the monetary stance, and
  - suggests the direction of (conditional) future policy.
- Table 3 (Press Releases Content - 2020-21) was constructed by checking specific topics or wordings inspired by selected topics of press releases relevant for the Communications pillar according to Unsal and others (2022).

### Similarity and tone of press releases
- Text similarity:
  - Texts in press releases were highly similar to the ones previously released.
  - In recent years, texts in the press releases of selected CCA countries are over 50 percent similar to the previous press releases in terms of word choice and word frequency.
  - This suggested elements of copy-and-paste in the press releases.
  - Armenia and Georgia press releases have been consistently highly similar to their previous ones.
  - Dissimilarity in press releases can create surprise to market participants and is found to affect macroeconomic outcomes (Ehrmann and Talmi, 2020).
- Tone:
  - Tones in the press releases were mostly negative.
  - In selected CCA countries except Azerbaijan, the press releases contain more negative words than positive words, resulting in negative sentiment score.
  - Sentiment is measured using a Loughran and McDonald (2011) dictionary that contains lists of positive and negative words.
  - Tones of CB communication are found to affect macroeconomic outcomes (Schmeling and Wagner,2019; Neuhierl and Weber,2019).
- Example measured metrics shown:
  - Panel A. Average Similarity, time series from 2008 to 2022 with country codes ARMAZEGEOKAZUZBKGZ.
  - Panel B. Average Sentiment, time series from 2008 to 2022 with country codes ARMAZEGEOKAZUZBKGZ.

### Transparency trends and indexes
- Role of transparency:
  - To increase credibility, transparency and communication are key.
  - Transparency increases the agents understanding of CB objectives and monetary policy decisions, increases accountability, strengthens the framework and its credibility.
  - Communication plays a key role to enhance predictability of monetary policy.
- IAPOC index findings:
  - IAPOC Indexes show that transparency has increased in the CCA region.
  - The overall IAPOC-transparency index rose significantly up to 2016 triggered by the transitions to IT.
  - The increase in transparency reflected both enhancements in Policy and Operational Strategy (e.g., countries started stating their numerical targets) and Communications (e.g., all now disclose their monetary policy decisions).
  - The average IAPOC-transparency index slightly deteriorated in 2018, driven, for instance, by not fully motivating and communicating the changes introduced to the MPF in some cases.
  - Panel A: IAPOC-transparency and its Pillars ranges shown 0.4 to 1.0 for years 2010, 2013, 2016, 2018, 2020.
  - Panel B: IAPOC-transparency, 2010-2020, country comparison Armenia, Georgia, Kazakhstan, Kyrgyz Republic* with values displayed across 2010 and 2020.
  - Note: For Kyrgyz Republic the first assessment available is for 2016.
- Dincer and Eichengreen index findings:
  - The index based on Dincer and Eichengreen (2014) also points out that transparency has increased in the CCA region along global trends.
  - This index goes further back in time for a larger number of countries and is in line with the IAPOC assessment.
  - Dincer and Eichengreen index shows that CCA transparency had an upward trend as observed in other economies.
  - The index also suggests transparency increased significantly via improvements in disclosing policy decisions and their motivation in the CCA region.
- Broader transparency trend (Dincer, Eichengreen and Geraats, 2022):
  - Panel A. Central Bank Transparency Trends (Index 0-15; 0=minimum and 15 = maximum) displays time series from 1998 to 2020 for Advanced economies, Emerging Europe, Emerging Europe IT, and CCA.
  - Panel B. Central Bank Transparency in the CCA (Index 0-15; 0=minimum and 15 = maximum) shows values for ARM, GEO, KAZ, KGZ, AZE, UZB, TJK, CCA, Emerging Europe IT for 1998, 2013 and 2020 (or latest available*).
  - Note: For Emerging Europe IT corresponds to 2019.
- Exceptional circumstances:
  - Central banks are generally expected to uphold a high level of transparency, but deviations may be acceptable in exceptional circumstances (e.g., during times of crisis) where providing less information on forecasts and confidence bands could help mitigate amplification of uncertainty in financial markets and misinterpretation of conditionality.
  - Such deviations should be carefully balanced with the need for maintaining public trust and confidence.

### Conclusions and policy recommendations
- Main conclusion:
  - CCA countries have made progress in upgrading their monetary policy frameworks, although they are at different stages of transition.
  - There are still some gaps in communications compared to international best practices.
  - Efforts to improve communications face challenges due to relatively low trust in state institutions and low financial literacy in the region. As a result, CCA CBs need additional time to refine this aspect of their monetary policy frameworks.
- Recommendations to enhance institutional design:
  - Strengthen safeguards for CB Independence and Accountability by including more independent board members in the executive boards and monetary policy committees.
  - Emphasize the role of independence when communicating with the public to raise awareness among politicians and government officials about the significance of central bank independence.
- Recommendations for Policy and Operational Strategy:
  - Enhance transparency regarding monetary operations and FX intervention strategies.
  - Improve data availability to contribute to better understanding of policy responses, strengthen transmission mechanism and enhance credibility.
  - Provide timely and comprehensive information on monetary operations and foreign exchange interventions; currently practiced by only a few CCA central banks.
- Recommendations for Communications:
  - Continue progress on communications and pursue further gains from being more transparent and consistent.
  - Clear communication is essential to enhance the pass-through of interest rates and anchor inflation expectations.
  - Streamline press releases in some countries and explicitly state the monetary policy stance, including numerical values of inflation targets, to contribute to anchoring inflation expectations more effectively.

### Methodology notes (Annexes)
- IAPOC index (Annex I):
  - The IAPOC index is a metric developed by Unsal and others (2022) providing a multidimensional characterization of monetary policy frameworks (MPFs) across 50 countries and over time.
  - The IAPOC index consists of three pillars: Independence and Accountability (I and A), Policy and Operational Strategy (P and O), and Communications (C).
  - The IAPOC metric uses a set of 225 criteria assessed using public information from central banks’ laws and websites.
  - Each criterion is scored 0 or 1 (or 0.5 for rare cases). Criteria scores are collected in five sub-pillars as unweighted averages; pillars are averages of sub-pillars; IAPOC index is the average of the three pillars.
- Press releases content coding (Annex II):
  - For 2020-21 press releases, a binary coding (1 or 0) was assigned per feature if observed or not, respectively.
  - Features assessed: Reasons for the decision; Monetary policy stance; Current state of the economy; Short term outlook; Risks; Direction of future monetary policy; Mentioning numerical target.
  - Example: For Armenia only 60 percent of the press releases mention the numerical targets in the press release.
  - Feature assignment examples:
    - Reasons for the decision: 1 if text clearly mentions reasons using wording like “For these reason...”, “because...”, “in order to...”, “aiming to...”, “keep/change rate to....”, “taking into account .... the board decided...”; 0 if not clear.
    - Monetary policy stance: 1 if text states the monetary policy is “tight”, “neutral”, “lose” (synonyms classified similarly); 0 otherwise.
    - Mentioning numerical target: 1 if text mentions the value (number) of the inflation target (E.g., 5 precent); 0 otherwise.

*Source: Monetary Policy Frameworks and Communication in the Caucasus and Central Asia, Working Paper No. WP/2023/251*

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_Source: https://www.imf.org/-/media/files/publications/wp/2023/english/wpiea2023251-print-pdf.pdf_