## _wp04226

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### Introduction and overview: scope, purpose, and accepted premises
- Scope and purpose:
  - Identifies issues when designing the structure, size, and composition of central bank boards and management.
- Accepted principles and rationale:
  - "Central bank autonomy and accountability are now generally accepted as good practice."
  - The paper adopts the term "autonomy" (operational freedom) rather than "independence" (lack of institutional constraints).
  - Rationale: delegation of authority over monetary policy to an autonomous central bank with clearly defined objectives and sufficient authority enhances credibility and flexibility, contributing to price stability and sustainable real growth.
- Empirical summary:
  - Empirical studies are "supportive but not compelling" of the premises for central bank autonomy.
- Survey basis and framework:
  - Focus: governing bodies and management of monetary authorities based on a survey of 101 laws on central banks and monetary authorities in force at end-2003.
  - Note: survey covers 113 countries; includes three monetary unions; number of countries higher than number of laws.

### Empirical evidence and key findings (Box 1)
- Empirical evidence on autonomy and inflation:
  - Studies generally supportive but sensitive to index design, elements, weights, and normalization (Mangano, 1998).
  - Findings include:
    - Industrialized countries that granted greater legal autonomy after the early 1970s tended to have lower average inflation (Berger, de Haan, and Eijfinger, 2000; Grilli, Masciandaro, and Tabellini, 1991).
    - Higher autonomy did not appear to harm average real growth (Alesina and Summers, 1993).
    - In developing countries, the correlation between legal autonomy and lower inflation is less significant (Cukierman, 1994 and 1992).
    - Transition economies: several studies report correlations between stronger autonomy and better inflation performance (Cukierman, Miller, and Neyapti (2001); Maliszewski (2000); Lybek (1999); Loungani and Sheets (1997)).
  - Proxies for de facto autonomy are often questionable (e.g., low turnover may reflect accommodation rather than autonomy).
  - Recent widespread commitments to combat inflation make further correlations harder to detect; some findings show inflation declines preceded legislative reforms (Daunfeldt and de Luna, 2003).
- Legal protections and governance provisions:
  - Common safeguards: qualification requirements, terms longer than appointing body's term, protection against changing compensation to a member’s disadvantage during term, protection against arbitrary dismissal.
  - Some laws require a double-veto arrangement for appointments.
- Accountability, transparency, and standards:
  - Institutional developments: 1999 IMF Code of Good Practices on Transparency in Monetary and Financial Policies; March 2000 IMF Safeguards Policy.
  - Safeguards Assessments review ELRIC areas: External audit mechanism; Legal structure and independence; financial Reporting; Internal audit mechanism; system of internal Controls.
- Lessons from corporate governance:
  - Central banks differ from corporations: primary objective typically price stability (not profit), financial autonomy important, governing bodies more influential in policy interpretation and implementation.
  - Only 9 of the 101 surveyed laws cover central banks as joint stock companies; 5 of the surveyed laws have private shareholders with strict profit allocation limits.
  - Fiduciary responsibilities and high-quality officeholders are crucial.

### Premises for autonomy and accountability (Box 2)
- Welfare foundations:
  - State’s primary purpose: maximize sustainable wealth; distribution left to politicians.
- Price and financial stability:
  - Price and financial sector stability are prerequisites for sustainable real growth; inflation primarily a monetary phenomenon.
- Credibility, time-inconsistency, and delegation:
  - Delegation to an autonomous central bank addresses time-inconsistency problems and political incentives to exploit short-term price stickiness.
  - "Conservative central banker" argument (Rogoff, 1985) supports higher weight on price stability.
- Imperfect information and expertise:
  - Imperfect information demands flexibility, discretion, and specialist expertise best exercised by an autonomous central bank (Romer and Romer, 1997).
- Accountability and transparency:
  - Checks and balances must be in place; central banks should provide timely, transparent, and reliable information to the public.
- Relevance for weak political institutions:
  - Autonomy, accountability, and transparency are beneficial even where political institutions are weak, though premises assume a democratic market economy with a free press.

### Classification of autonomy types and survey statistics
- Autonomy types:
  - (i) goal autonomy
  - (ii) target autonomy
  - (iii) instrument autonomy
  - (iv) limited autonomy
- Key survey statistics (101 laws; 113 countries):
  - 58 percent of the surveyed laws have goal or target autonomy.
  - 63 percent of the surveyed laws provide for one board.
  - 78 percent of the surveyed laws delegate day-to-day management responsibilities solely to the governor.
  - Table 2 (Authority over Exchange Rate Policy, end-2003; percent of laws in each group; number of surveyed laws):
    - High income: Central Bank determines exchange rate regime: --; Central Bank determines exchange rate in consultation with government: 4; Government determines exchange rate regime in consultation with central bank: 4; Government determines exchange rate regime: 92; Total 100; Number of laws 28
    - Upper middle income: 18, 18, 9, 55; Total 100; Number of laws 11
    - Lower middle income: 16, 22, 10, 52; Total 100; Number of laws 31
    - Low income: 6, 43, 6, 45; Total 100; Number of laws 31
    - Total (all income groups): 9, 24, 6, 61; Total 100; Number of laws 101
  - Table 3 (Type of Autonomy and Accountability for Monetary Policy, end-2003; percent of laws in each group; number of surveyed laws):
    - Goal autonomy: Head of State/President 19; Legislature 19; Head of Cabinet 6; Cabinet 13; Min. of Finance 37; Other 6; Total 100; Number of laws 16
    - Target autonomy: 10; 50; --; 7; 14; 19; Total 100; Number of laws 42
    - Instrument autonomy: 9; 34; 8; 6; 37; 6; Total 100; Number of laws 35
    - Limited autonomy: --; --; --; 25; 75; --; Total 100; Number of laws 8
    - Total (all autonomy types): 10; 35; 4; 9; 33; 9; Total 100; Number of laws 101
  - Table 4 (Type of Autonomy and Structure of Governing Bodies, end-2003; percent of laws in each group; number of surveyed laws):
    - Directors — One Board / Two Boards / Three or more Boards; Management — Governor / Governing Board; Number of laws
    - Goal autonomy: Directors 69 / 19 / 12; Total 100; Management Governor 94; Governing Board 6; Number of laws 16
    - Target autonomy: 55 / 24 / 21; Total 100; Management Governor 67; Governing Board 33; Number of laws 42
    - Instrument autonomy: 69 / 25 / 6; Total 100; Management Governor 83; Governing Board 17; Number of laws 35
    - Limited autonomy: 88 / -- / 12; Total 100; Management Governor 88; Governing Board 12; Number of laws 8
    - Total (all autonomy types): 63 / 23 / 14; Total 100; Management Governor 78; Governing Board 22; Number of laws 101

### Governance functions, board types, and design trade-offs
- Board and committee types and roles:
  - Policy boards: determine monetary policy and exchange rate policy (if applicable); in goal autonomy decide objective priority; in target autonomy specify target within the objective.
  - Implementation boards: decide how to implement targets (e.g., changing key interest rates); often comprised of management representatives for technical decisions.
  - Supervisory boards: oversee objectives/tasks, financial condition, internal controls, and efficient use of resources; review gross negligence/misconduct cases and approve annual reports, budgets, and financial statements.
  - Advisory boards: advise policy/implementation boards; only 10 surveyed laws mandate advisory boards.
  - Audit committees: assist supervisory function; few laws explicitly require them (examples: Cambodia and Nepal).
- Boards performing several functions:
  - 63 percent of laws have one board often performing policy, implementation, and supervisory functions.
  - Risks: overlapping functions can dilute responsibility and create incentives to set less ambitious targets.
  - Management involvement on boards can help set realistic targets but may blur oversight.
- Size, chairmanship, meeting procedures, and composition:
  - Typical policy board size: most have seven to nine members (Table 5 referenced).
  - Governor is usually chairman of management and implementation boards; in 74 percent of cases governor is also chairman for the supervisory board.
  - Voting: majority or qualified majority requirements; quorum rules often require presence of nonexecutive directors.
  - Meeting frequency norms:
    - Supervisory boards: less frequent (e.g., quarterly).
    - Policy boards: quarterly or monthly; monthly if also implementation board.
    - Management boards: weekly or fortnightly.
  - Composition specifics:
    - Government representatives often participate; in almost half of these cases they do not have voting rights (Table 6 referenced).
    - Increasing tendency to prohibit government officials having voting rights on boards.
    - Some laws require sectoral or regional representation; a few permit employee representation.
  - Conflict-of-interest controls:
    - Prohibitions on governors/deputies holding boards in supervised institutions; full-time requirements; prohibitions on financial/familial conflicts; restrictions on political activity in some laws.

### Nomination, appointment, terms, remuneration, dismissal, and safeguards
- Nomination and appointment:
  - Double-veto arrangements (nominator and appointer separate) recommended to depoliticize appointments but can produce stalemate; about 60 percent of governors have some type of double-veto arrangement (Table 7).
  - For other board members, about half of surveyed laws include double-veto arrangements (Table 8).
- Qualification and fit-and-proper standards:
  - Professional requirements commonly include experience in banking, finance, economics, law; some laws specify duration of experience.
  - Citizenship often required; disqualifications include criminal convictions, bankruptcy, pending tax obligations.
- Terms and staggered appointments:
  - Terms are fixed in most central bank laws; often around five years where fixed (Table 9 referenced).
  - Recommendation: term lengths longer than the appointing body's election cycle; staggered terms are good practice—explicitly required in about 20 percent of surveyed laws.
- Remuneration and legal immunity:
  - Profit sharing generally inappropriate; two surveyed laws allow profit sharing.
  - Performance-based pay for board members generally avoided.
  - Legal immunity for actions taken in good faith considered good practice; some laws specify liability for breaches.
- Dismissal and safeguards:
  - Protection against arbitrary dismissal is key; dismissal typically allowed for breaches of qualification requirements, serious misconduct, or gross negligence.
  - Safeguards include requiring legislative approval for dismissal (example: Peru requires two-thirds of Congress for dismissal in case of crime or serious misconduct).

### Financial, reporting, and exchange rate policy provisions (Appendix I and II)
- Key elements from Appendix I (Main guidelines on central bank autonomy and accountability):
  - Objectives and targets:
    - "Price stability, as the best contribution monetary policy can make to balanced sustainable growth, is the preferable formulation for the primary objective."
    - A specific, published target should be established; targets should be easy to monitor; consider explicit but limited "escape clauses" for exogenous shocks.
  - Monetary policy authority:
    - "A central bank should determine and implement monetary policy to achieve its target."
    - Bank should have authority "to determine quantities and interest rates on its own transactions without interference from the government."
  - Conflict resolution:
    - "A clear and open process should be established to resolve any policy conflict between the central bank and the government."
    - If overruled, responsibility for results should be clearly attributed to the government.
    - Example: central bank to notify public if it cannot be held accountable for price stability due to government inaction when reserves are insufficient.
  - Governor:
    - Nomination/appointment by separate bodies recommended; term longer than appointing body's election cycle; dismissal only for breaches of qualifications or misconduct; performance-based dismissal possible with judicial safeguards.
  - Board:
    - Highest-level board should include a majority of nonexecutive, non-government directors.
    - Direct government representatives should be eliminated from a policy board and probably from a monitoring board; if present, ideally without voting rights.
    - Nomination/appointment by different bodies; staggered terms; dismissal only for breaches/misconduct.
  - Credit to government:
    - If not prohibited, direct credit should be limited (example: temporary advances limited to a small ratio of average recurrent revenue, "say, 5 percent"); should bear market-related interest; securitization recommended.
    - Central bank should not underwrite primary market government securities except with noncompetitive bids within overall credit limits; should not finance quasi-fiscal activities.
  - Financial conditions and reporting:
    - Central bank should have sufficient financial autonomy with matching accountability.
    - Budget not subject to normal annual appropriation procedures; only realized net profits, after prudent provisioning and reserves allocation, returned to government.
    - Government should ensure solvency by transferring interest-bearing negotiable securities if capital is depleted.
    - External auditors and auditor general should be allowed to review accounts and procedures.
    - Policy statements suggested at "say, six-month intervals" and published without prior government approval; annual financial statements audited externally; summary balance sheets published weekly or monthly.
- Exchange rate policy (Appendix II summary):
  - Historically government determines exchange rate regime in about two-thirds of surveyed countries; implementation normally left to central bank.
  - Newer laws increasingly delegate authority over the exchange rate regime to the central bank.
  - Classification implications:
    - If government pegs regime but leaves implementation to central bank: classified as instrument autonomy.
    - If government legally has authority but decides to float while monetary policy formulation rests with central bank: classified as target or goal autonomy, if other conditions are observed.
  - Empirical observations:
    - 58 percent of surveyed laws have goal or target autonomy.
    - Government formally has authority over the exchange rate regime in about two-thirds of surveyed laws.
    - Small open economies reaching full capital account liberalization may delegate regime authority to the central bank (example cited: Latvia).
  - Coordination concerns:
    - Government financing of a budget deficit abroad can complicate central bank sterilization of private capital inflows and maintaining price stability.

### Policy recommendations and issues for governance design
- Core recommendations:
  - Distinguish types of autonomy (goal, target, instrument, limited) to define board and management functions; consider country-specific factors (economic development, political system, judicial tradition).
  - Ensure legal consistency between autonomy, authority, and accountability.
  - Balance board simplicity and small size (decisiveness) against need for balanced, informed views; most policy boards ideally seven to nine members.
  - Policy boards: include outside members with special expertise only if autonomy is preserved and conflicts of interest avoided.
  - Implementation/target boards: comprise highly qualified, generally full-time directors; government representatives with voting rights should not participate in implementation boards.
  - Supervisory boards: majority nonexecutive/outside members; governor should not chair a pure supervisory board but should be present to answer questions.
  - Use committees (audit, advisory) to include expertise and segregate authority, but avoid diluting governing bodies’ responsibilities.
  - Nomination and appointment procedures and safeguards against undue influence are likely more important than monetary incentives for board performance.
  - Ensure transparent reporting: policy statements (e.g., six-month intervals), frequent summary balance sheets (weekly or monthly), annual audited financial statements.
  - Limit direct credit to government (e.g., temporary advances limited to "say, 5 percent" of average recurrent revenue) and prohibit quasi-fiscal financing by the central bank.
  - Include conflict-resolution procedures between central bank and government and clear attribution of responsibility if central bank effectiveness is limited by government actions.

### Concluding observations from the survey
- Governance structures vary widely; de jure design may differ from de facto practice.
- Many central bank laws may lag trends toward autonomy and accountability.
- Recommended design approach:
  - Determine acceptance of premises for autonomy/accountability.
  - Define objectives, tasks, and functions to derive necessary authority and powers.
  - From authority and powers, design accountability provisions and governance structures accounting for country-specific conditions.
- Survey summary statistics reiterated:
  - About 63 percent of surveyed laws have one board.
  - 78 percent of surveyed laws delegate sole management responsibility to the governor.
  - Terms for board members commonly fixed; where fixed often around five years; staggered terms explicitly required in about 20 percent of laws.

*Source: _wp04226 — IMF PDF chapter/section (excerpt).*

### References..............................................................................................................

### References

### Tables
- 1.     Type of Autonomy in Selected Central Bank Laws, end-2003 .......................................15
- 2.     Authority over Exchange Rate Policy, end-2003 ............................................................16
- 3.     Type of Autonomy and Accountability for Monetary Policy, end-2003.........................18
- 4.     Type of Autonomy and Structure of Governing Bodies, end-2003.................................22
- 5.     Number of Members in Different Boards, end-2003.......................................................26
- 6.     Composition of Different Governing Bodies, end-2003..................................................29
- 7.     Nomination and Appointment of Central Bank Governors, end-2003 ............................33
- 8.     Nomination and Appointment of Non-ex officio Board Members, end-2003.................34
- 9.     Terms of Different Central Bank Boards of Non–ex officio Members, end-2003 ..........36

### Figures
- 1.  Factors in Designing a Consistent Governance Structure...................................................13
- 2.  The Management-Board Pinnacle.......................................................................................20
- 3.  Illustration of a Consistent Central Bank Law....................................................................38

### Boxes
- 1. Empirical Evidence of Central Bank Autonomy and Accountability....................................5
- 2. Premises for Central Bank Autonomy and Accountability..................................................10
- 3. Selected Country-Specific Factors Affecting the Central Bank Governance Structure ......12
- 4. The Changing Governing Bodies of the Bank of England ..................................................21

### Appendices
- I. Main Guidelines on Central Bank Autonomy and Accountability ..................................48
- II.    Central Bank Laws Covered in the Survey......................................................................50

### Introduction and Overview — key points, findings, and premises
- Scope and purpose:
  - The paper identifies issues to consider when designing the structure, size, and composition of the boards and management of a central bank.
- Accepted principles:
  - "Central bank autonomy and accountability are now generally accepted as good practice."2
  - The paper adopts the term "autonomy" rather than "independence" and notes that autonomy entails operational freedom while independence indicates a lack of institutional constraints.2
- Consensus and variation:
  - There is less consensus regarding the structure of governing bodies of central banks, due in part to country-specific conditions and in part because there are many ways to achieve the same objective.
  - The functions to be performed by governing bodies follow logically from the degree of autonomy delegated to the central bank.
  - Governance arrangements may range from a comprehensive structure with separate bodies for each function to a single board with overlapping functions; composition becomes more complicated when one board serves several functions.
- Rationale for autonomy:
  - "Central bank autonomy and accountability are now generally accepted as the best way to achieve and maintain price stability, which is conducive to sustainable real growth."3
  - Both credibility and flexibility can be achieved by delegating authority over monetary policy to an autonomous central bank with clearly defined objectives and sufficient authority to achieve those objectives, while remaining accountable to the government to ensure checks and balances.
- Empirical evidence:
  - Empirical studies are "supportive but not compelling" regarding the premises for central bank autonomy (Box 1).
- Features implied by autonomy:
  - Ability to resist undue influences from government, industry, and other interests.
  - Board and management design should help depoliticize decision making (Romer and Romer, 1997).
  - Specified conflict resolution procedures between the central bank and the government to provide transparent attribution of responsibility for decisions.
  - Sufficient authority to achieve objectives and control the central bank’s balance sheet.
  - Prohibiting, or at a minimum strictly limiting, direct central bank credit to the government.
  - Central bank financial condition should not adversely affect its authority.
  - Transparent reporting and accountability procedures to assure the public that monetary policy and financial system policies are not manipulated.
- Supporting references and further discussion:
  - These elements are summarized in Appendix I and discussed in Lybek (1998).
  - Additional literature cited for discussion of central bank autonomy includes Cukierman (2002, 1994, and 1992), Berger, de Haan, and Eijfinger (2000), Blinder (1998), Lybek (1998), Fischer (1995a and 1995b).

*Source: _wp04226 - References (excerpt) — IMF PDF chapter/section*

### Box 1. Empirical Evidence of Central Bank Autonomy and Accountability

### Box 1. Empirical Evidence of Central Bank Autonomy and Accountability

### Empirical evidence on autonomy and inflation
- Empirical studies generally supportive of central bank autonomy but not compelling; results sensitive to index design, elements, weights, and normalization procedures (Mangano, 1998).
- Main study types:
  - Compare de jure autonomy (and sometimes accountability) indices with inflation performance.
  - Correlate autonomy with inflation while controlling for other factors.
  - Use proxies for de facto autonomy and compare with inflation; proxies often questionable (e.g., low turnover of governors may reflect accommodation rather than autonomy) (de Haan and Kooi, 2000).
  - Estimate inflation or interest-rate changes after legislative amendments; correlations found but causality remains challenging.
- Key empirical findings:
  - Industrialized countries that granted greater legal autonomy after the early 1970s tended to have lower average inflation (Berger, de Haan, and Eijfinger, 2000; Grilli, Masciandaro, and Tabellini, 1991).
  - Higher autonomy did not appear to harm average real growth (Alesina and Summers, 1993), though sacrifice ratios have been discussed later (Cukierman, 2002).
  - In recent years, widespread commitment to combat inflation makes identifying further correlations between increased autonomy/accountability and lower inflation more difficult.
  - Daunfeldt and de Luna (2003) find declines in inflation often preceded legislative reforms.
  - Spiegel (1998) found the 1997 Bank of England legislative announcement coincided with a decline in the interest rate.
  - In developing countries, the correlation between legal autonomy and lower inflation is less significant (e.g., Cukierman, 1994 and 1992).
  - A pegged exchange rate can temporarily substitute as a nominal anchor and alleviate inadequate autonomy (Anyadike-Danes, 1995).
  - Budget deficit size and its financing often dominate central bank independence measures (Fry, 1998).
  - Schuler (1996), surveying 156 countries for 1952–93, finds central banks in developing countries performed worse than those in developed countries.
  - Gutiérrez (2003) finds a significant relationship between higher constitutional autonomy/accountability and better inflation performance in Latin American and Caribbean countries.
  - Jácome and Vázquez (forthcoming) find, after controlling for exchange rate regime and fiscal deficits, a negative correlation between more legal central bank autonomy and better inflation performance in Latin American and Caribbean countries.
  - Transition economies: several studies report correlations between stronger autonomy and better inflation performance (Cukierman, Miller, and Neyapti (2001); Maliszewski (2000); Lybek (1999); Loungani and Sheets (1997)).

### Legal protections and governance provisions
- Common legal safeguards to insulate governing board members, management (governor, deputy governors, general managers), and committee members from undue influence and conflicts of interest:
  - Qualification requirements for officeholders.
  - Terms longer than those of the body with predominant appointment influence.
  - Protection against changing compensation to a member’s disadvantage during the term.
  - Protection against arbitrary dismissal.
  - Some laws require a double-veto arrangement: one arm nominates and another appoints key members.
- Accountability and oversight must also be ensured; dismissal for gross misconduct should be allowed.

### Accountability, transparency, and international standards
- Over the last two decades inflation has stabilized at low levels in most countries; public focus has shifted toward accountability and transparency.
- Institutional developments:
  - 1999: IMF Code of Good Practices on Transparency in Monetary and Financial Policies adopted.
  - March 2000: IMF Safeguards Policy adopted, primarily to address misreporting and potential misuse of IMF resources.
- Literature on accountability and transparency has expanded (e.g., de Haan, Amtenbrink, and Waller (2004); Zilioli (2003); Chortareas, Stasavage, and Sterne (2002); Cecchetti and Krause (2002)), but literature on central bank governance remains limited with exceptions such as Schiffman (2004).
- Safeguards Assessments review ELRIC areas: External audit mechanism; Legal structure and independence of the central bank; financial Reporting; Internal audit mechanism; and system of internal Controls; they stress governance and board oversight of the central bank’s financial condition, occasionally recommending an audit committee.

### Lessons from corporate governance and differences with commercial corporations
- OECD Principles of Corporate Governance (1999, revised) define corporate governance as relationships among management, board, shareholders, and other stakeholders and the structure through which objectives are set and performance monitored.
- Basel Committee’s Enhancing Corporate Governance for Banking Organizations supplements OECD principles for banks.
- Macey and O’Hara (2003): commercial banks should be held to higher corporate governance standards emphasizing fiduciary responsibilities; central banks may require even further extension due to policy implications.
- Key differences between central banks and corporations:
  - Objectives: central banks often have price stability as primary objective; profit maximization is generally not an objective for central banks.
  - Financial autonomy is important for central banks to fulfill functions (Ize, forthcoming; Martínez-Resano, 2004; Stella 2003; Sullivan, 2003; Lybek 1998).
  - Governing bodies and committees of central banks have more influence over interpreting, formulating, and implementing objectives, increasing complexity in governance and reporting.
  - Only a small number of central banks are joint stock companies: 9 of the 101 surveyed laws; even fewer have private shareholders: 5 of the surveyed laws—private shareholders face strict profit allocation limits.
  - Boards in central banks often play a less important role in nominating and appointing the chief executive officer compared with many joint stock companies.
- Quality and integrity of officeholders are crucial; nomination and appointment procedures are particularly important.
- Fiduciary responsibilities of governing-body members should be explicitly stated as duties to the central bank and all stakeholders, present and future.

### Financial-sector responsibilities and interaction with regulation
- Many central banks are revisiting frameworks for financial sector stability (Oosterloo and de Haan, 2003).
- Even if not supervising institutions, central banks typically oversee payment systems and coordinate as lender of last resort with banking supervisors.
- Guiding principles for monetary policy (consistency among objectives, authority, autonomy, accountability) should also apply to financial regulators (Quintyn and Taylor, 2003; Abrams and Taylor, 2000).
- Banking supervisors may have broader, sometimes competing objectives (ensure sound banking system, protect depositors, guard consumers), and their enforcement powers (penalties, revoking licenses) demand special accountability provisions, particularly judicial redress (Hüpkes, Quintyn, and Taylor (forthcoming)).

### Objectives and priority setting
- Price stability should be the primary objective of a central bank.
- Financial sector stability and price stability both contribute to efficient resource allocation; they are mutually consistent in the longer term but may compete in the short run.
- Recommendation: Give priority to price stability to avoid monetary easing that temporarily masks structural financial weaknesses; without prejudice to price stability, central banks should ensure financial sector stability and, without prejudice to these two objectives, generally support government economic policies to facilitate coordination.

### Survey basis and analytical framework
- This paper focuses on governing bodies and management of monetary authorities as a factor in good governance based on a survey of 101 laws on central banks and monetary authorities in force at end-2003.
- Survey notes:
  - The survey includes three monetary unions; the number of countries (113) is higher than the number of central bank laws (101).
  - In EMU each member has its own central bank law in addition to the union law; member countries of the Central African Monetary Union and West African Monetary Union do not have their own central bank law—only the law of the union is included.
- Recommended approach:
  - Determine acceptance of premises for autonomy/accountability.
  - Define objectives, tasks, and functions of the bank to derive necessary authority and powers.
  - From authority and powers, design accountability provisions and governance structures considering country specific conditions.
- Classification of autonomy types (affecting governing-body functions):
  - (i) goal autonomy
  - (ii) target autonomy
  - (iii) instrument autonomy
  - (iv) limited autonomy
  - Note: Debelle and Fischer (1994) and other literature often distinguish goal/target vs. instrument autonomy; Lybek (1998, 1999) distinguishes goal and target autonomy as well.

*Source: _wp04226 - Box 1. Empirical Evidence of Central Bank Autonomy and Accountability*

### Box 2. Premises for Central Bank Autonomy and Accountability

### Box 2. Premises for Central Bank Autonomy and Accountability

### Purpose and welfare foundations
- The primary purpose of the state is to maximize sustainable wealth, while leaving the distribution and welfare to the politicians.
- Welfare economics criteria:
  - Change when somebody is better off and nobody is worse off (the Pareto criterion).
  - Change when the social welfare function can be improved (Bergson criterion).

### Price and financial stability as prerequisites for sustainable growth
- Price and financial sector stability are conducive to sustainable real economic growth in a market economy.
- High and variable inflation creates noise, impeding the price mechanism in efficiently allocating scarce resources.
- Inflation is primarily a monetary phenomenon which can only be influenced by the central bank in the medium term.
- Even with regulated prices, inflation will emerge and affect unregulated prices and create rationing and grey markets.

### Credibility, costs, and the limits of demand management
- A credible monetary policy can reduce inflation at lower costs.
- Attempts to stimulate output above its potential—the expectation augmented Phillips curve—are futile.
- Short-term price stickiness can be exploited by unexpected inflation and result in a slower adjustment to new relative prices, but it postpones adjustment to permanent changes and creates an inflation bias, which impedes an efficient resource allocation.
- The only way to facilitate sustainable economic growth is to address underlying structural deficiencies.

### Time-inconsistency, political incentives, and the case for delegation
- Politicians have many competing objectives in the short run, and it may be tempting to manipulate monetary policy by temporarily exploiting short-term price stickiness.
- Even if politicians state they will pursue price stability, the public knows politicians have strong incentives to manipulate monetary policy (the time-inconsistency problem, according to Kydland and Prescott, 1977).
- The temptation to manipulate is particularly pronounced up to elections, creating election cycles (Maloney and others, 2003).
- The general public will therefore demand a higher real interest rate to compensate for this inflation bias, which hampers sustainable growth.
- A “conservative central banker” weighting price stability higher than the social objective function to neutralize the myopic behavior of the politicians is thus optimal (Rogoff, 1985).

### Imperfect information, flexibility, and specialist expertise
- Imperfect information demands flexibility, discretion, and specialist expertise, and the conduct of monetary policy may thus best be left to an autonomous central bank (Romer and Romer, 1997).
- It is the prerogative of the state to conduct monetary policy, but it can only remain credible if it follows a simple rule, which can result in substantial adjustment costs.
- Although a contingent rule is more flexible, it will not remain credible unless pursued by an autonomous body.
- The optimal reduction of the adjustment cost is to use all information rationally (Buiter, 1981), but this flexibility is only credible if conducted by an autonomous central bank.
- Even if politicians’ preference for price stability were credible, the electorate knows politicians have imperfect information about the ever-changing economy and the continuously changing information set; it is thus rational to delegate authority to a generally better informed central banker—thus creating an indirect democratic institution (Piketty, 1999).

### Accountability, transparency, and checks and balances
- Checks and balances, or accountability, must be in place to prevent abuse of power by autonomous institutions.
- A clearly defined arrangement must be determined between the principal—whether it be between the legislature, the head of state, the cabinet, or the minister of finance representing the general public—and the agent—the central bank (Persson and Tabellini (1993) and Walsh (1995)).
- Central banks should provide timely, transparent, and reliable information to the general public.
  - Disseminating such information alleviates market failures caused by heterogeneous and imperfect information and reduces uncertainty, which contributes to a more efficient resource allocation and hence reduces the sacrifice ratio (Chortareas, Stasavage, and Sterne (2002), and Cecchetti and Krause (2002)).

### Relevance for countries with weak political institutions
- Central bank autonomy, accountability, and transparency are also beneficial in countries with otherwise weak political institutions.
- The above premises are based on the implicit assumption of a democratic market economy with a free press that will react on the information provided, which will facilitate discipline and help prevent excesses.
- However, even in countries with other systems, it is important to have an appropriately designed central bank law with a view to promote efficient allocation of scarce resources.

*Box 2. Premises for Central Bank Autonomy and Accountability*

### Appendix II.

### _wp04226 - Appendix II.

### Exchange rate policy
- Historically, the government (usually the cabinet), not the central bank, has determined the exchange rate regime; this remains the case in about two-thirds of the surveyed countries.
- Implementation of exchange rate policy, including determining the exchange rate within the regime, is normally left to the central bank.
- Newer central bank laws increasingly delegate authority over the exchange rate regime to the central bank.
- With capital account liberalization and increased capital mobility, monetary and exchange rate policy are intrinsically linked; coordination and conflict resolution procedures between the government and the central bank are therefore important in central bank law.
- Classification implications:
  - If the government pegs the exchange rate or follows a specified pattern while leaving implementation to the central bank, this is classified as instrument autonomy (the anchor is determined by the government).
  - If the government legally has authority over the regime but decides to float while monetary policy formulation rests with the central bank, the law is classified as target or goal autonomy, provided other conditions are observed.
- Empirical observations:
  - 58 percent of the surveyed laws have goal or target autonomy.
  - The government formally has authority over the exchange rate regime in about two-thirds of the surveyed laws.
  - Small open economies that have delegated the authority over the exchange rate regime to the central bank (for example, Latvia) are typically countries that have reached, or are envisaging, full capital account liberalization.
- Policy coordination concern example:
  - Government financing of a budget deficit abroad can complicate a central bank’s sterilization of private capital inflows and maintaining price stability.

- Table 2 summary: Authority over Exchange Rate Policy, end-2003 (percent of laws in each group; number of surveyed laws)
  - High income: Central Bank determines exchange rate regime: --; Central Bank determines exchange rate in consultation with government: 4; Government determines exchange rate regime in consultation with central bank: 4; Government determines exchange rate regime: 92; Total 100; Number of laws 28
  - Upper middle income: 18, 18, 9, 55; Total 100; Number of laws 11
  - Lower middle income: 16, 22, 10, 52; Total 100; Number of laws 31
  - Low income: 6, 43, 6, 45; Total 100; Number of laws 31
  - Total (all income groups): 9, 24, 6, 61; Total 100; Number of laws 101

### Diminished and limited autonomy
- Definitions and conditions:
  - For goal and target autonomy, inadequate protection of directors against arbitrary dismissal may reduce incentives to choose sufficiently ambitious objectives and targets.
  - For instrument autonomy, a long-period, published agreement between the central bank and the government (with key elements) or defining the target by focusing on core inflation is needed to fully diminish inflation bias.
- Classification:
  - If broader conditions listed in Appendix I are not entrenched in the central bank law, the central bank is classified as having diminished autonomy.
  - If most of these requirements are not observed, the central bank has limited autonomy; governance challenges remain, though similar to other government agencies.
- Subjectivity:
  - Classification into diminished autonomy is more subjective, relying primarily on interpretation of the central bank law and on evolving practices that may differ from the law’s intentions.
  - Additional subjectivity arises from the weight ascribed to different factors in Appendix I that contribute to autonomy and accountability.
- Examples and caveats:
  - Lack of a prudent limit on credit to the government severely impedes autonomy in countries with poor inflation performance, but may be less important where inflation targeting implicitly limits credit (example referenced: New Zealand).
  - Norway is classified in this survey as having diminished instrument autonomy despite adopting inflation targeting and having no explicit limit on credit to the government, because the law has other shortcomings compared to best practice.

### Accountability
- Purpose:
  - Accountability provisions should ensure the central bank exercises policy and functions effectively and efficiently and manages resources cost-effectively, while protecting the bank’s financial condition.
- Trends in accountability for monetary policy:
  - Traditionally, central banks have been accountable to the minister of finance, the head of state, or the cabinet.
  - Newer central bank laws increasingly make the central bank accountable to the legislature for monetary policy—more than a third of the surveyed laws.
  - Over half of the countries accountable to the legislature are those with target autonomy.
  - About half of the countries with target autonomy are accountable to the legislature.
  - In cases of limited autonomy, more central banks are accountable to the minister of finance.
  - Some countries are accountable to both legislature and executive (examples: Paraguay and the Philippines).
- Table 3 summary: Type of Autonomy and Accountability for Monetary Policy, end-2003 (percent of laws in each group; number of surveyed laws)
  - Goal autonomy: Head of State/President 19; Legislature 19; Head of Cabinet 6; Cabinet 13; Min. of Finance 37; Other 6; Total 100; Number of laws 16
  - Target autonomy: 10; 50; --; 7; 14; 19; Total 100; Number of laws 42
  - Instrument autonomy: 9; 34; 8; 6; 37; 6; Total 100; Number of laws 35
  - Limited autonomy: --; --; --; 25; 75; --; Total 100; Number of laws 8
  - Total (all autonomy types): 10; 35; 4; 9; 33; 9; Total 100; Number of laws 101
- Accountability for financial conditions:
  - Often to the same body as monetary policy accountability, but in several cases the minister of finance, the president, or the cabinet play a stronger monitoring role.
  - Some French-influenced systems have a special censor continuously reviewing the bank’s financial situation.
  - Minister of finance typically monitors financial conditions more closely as the owner’s representative.
- Reporting and transparency practices:
  - Timely and transparent reporting is crucial.
  - Central banks generally publish policy statements; some newer laws require such statements twice a year reporting past outcomes and policy for the forthcoming period—particularly important for goal autonomy.
  - Central bank laws typically require an annual report on operations and externally audited financial statements.
  - Annual financial statements are usually audited by an independent external auditor, the auditor general, or both.
  - Some laws explicitly require an internal auditor or comptroller.
  - Frequent—at a minimum monthly—publication of summary balance sheet information is good practice and is stipulated in several central bank laws.
  - Many central bank laws now explicitly stipulate that the central bank be ready to answer questions raised by the legislature.

### Changing functions of governing bodies
- Governance role:
  - Appropriate governance structures can entrench central bank autonomy and facilitate accountability by depoliticizing processes.
  - The design of the junction between management and board is difficult and varies across jurisdictions.
  - Stakeholders of central banks do not always have the same recourse as shareholders of commercial corporations, creating additional governance challenges.
- Evolution with increased autonomy:
  - Functions of governing bodies have changed over time with increased autonomy; new tasks imply new qualifications for positions.
  - Reviews of amendments to many central bank laws suggest the changing functions are not always fully appreciated.
  - When central banks are delegated more autonomy and authority, governing bodies’ functions diverge further from those of commercial corporations.
- Recommendation:
  - It is useful to analyze governing bodies in light of the degree of autonomy delegated to the central bank.

### Directors, officers, and their functions
- Number of boards:
  - In the survey, 63 percent of the surveyed laws provide for one board, 23 percent have two boards, and the remaining laws provide for three or more boards.
  - The term “board” may include committees if they perform one of the governance functions discussed.
  - Type of autonomy does not necessarily determine the number of boards.
  - In 78 percent of the surveyed laws, management responsibilities are solely delegated to the governor.
  - When delegated to a management board, central banks more often have target autonomy.
- Table 4 summary: Type of Autonomy and Structure of Governing Bodies, end-2003 (percent of laws in each group; number of surveyed laws)
  - Directors — One Board / Two Boards / Three or more Boards; Management — Governor / Governing Board; Number of laws
  - Goal autonomy: Directors 69 / 19 / 12; Total 100; Management Governor 94; Governing Board 6; Number of laws 16
  - Target autonomy: 55 / 24 / 21; Total 100; Management Governor 67; Governing Board 33; Number of laws 42
  - Instrument autonomy: 69 / 25 / 6; Total 100; Management Governor 83; Governing Board 17; Number of laws 35
  - Limited autonomy: 88 / -- / 12; Total 100; Management Governor 88; Governing Board 12; Number of laws 8
  - Total (all autonomy types): 63 / 23 / 14; Total 100; Management Governor 78; Governing Board 22; Number of laws 101
- Functions of governing boards and management:
  - Classification distinguishes boards by assigned functions, including day-to-day management; management representatives are usually members of decision-making boards.
  - Policy boards:
    - Determine monetary policy and exchange rate policy, if applicable.
    - In goal autonomy, determine which objective to give priority.
    - In target autonomy, specify the target within the defined primary objective.
    - More than half of the surveyed central bank laws have a policy board, though some policy boards have other functions.
    - Consideration should be given to including nonexecutive members on policy boards, provided they lack conflicts of interest and do not endanger autonomy.
    - A country with instrument autonomy would not have a policy board since policy is set by the government.
  - Implementation boards:
    - Make decisions on how to implement the targets (for example, changing key interest rates to support an inflation target or exchange rate).
    - In goal and target autonomy, the implementation board is often the same as the policy board or the management board.
    - A majority or entire implementation board may comprise management representatives for technical decisions.
    - In instrument autonomy, implementation decisions are the highest priority of the central bank and are generally delegated to a board, but occasionally to one person (example referenced: New Zealand).
    - Advantages and risks:
      - Smaller boards or single decision-makers avoid dilution of responsibility and facilitate accountability.
      - Concentration of responsibility in few people delegates substantial responsibility to very few individuals and poses risks.

- Illustrative case (Box 4): The Bank of England
  - Historical evolution summarized: founded in 1694; nationalized in 1946; reduced court membership from 24 to 16; Banking Act of 1987 gave banking supervision role; 1993 quarterly Inflation Report; 1997 government gave Bank responsibility for setting interest rates to achieve government’s inflation target; 1998 new central bank law established Monetary Policy Committee (MPC) and redefined the Court’s supervisory role; MPC comprises five executive and four nonexecutive members chosen for monetary policy expertise; Court comprises the Governor, two Deputy Governors, and 16 nonexecutive Directors; responsibility for banking supervision moved to the Financial Services Authority in June 1998.

*Source: Selected central bank laws and analysis contained in Appendix II of the referenced paper.*

### chapter 2 in Blinder 2004, and Blinder and Morgan, 2000). King (2002), for instance, when discussing the

### _wp04226 - chapter 2 in Blinder 2004, and Blinder and Morgan, 2000). King (2002), for instance, when discussing the

### Advisory boards
- Purpose: advise policy boards, implementation boards, or management; provide a more balanced view; address regional concerns; involve representatives from different economic sectors; include former governors.
- Prevalence: Only 10 of the surveyed laws have mandated advisory boards.
- Alternative forms of expertise: invite experts to participate in board meetings without voting rights; establish committees or subgroups of the board to study problems in detail.

### Supervisory boards
- Responsibilities:
  - (i) achieving objectives, tasks, and functions,
  - (ii) the financial condition of the central bank,
  - (iii) effective internal controls,
  - (iv) in some cases, efficient use of its resources.
- Key roles: review cases of gross negligence or gross misconduct by the governor and other board members; approve the annual report, budget, and financial statements before publication.
- Design trade-offs:
  - Proper composition can depoliticize oversight; unclear tasks/powers can invite government or legislative intervention.
  - Poorly designed supervisory boards with strong political figures can unduly influence the central bank.
  - Some countries limit supervisory review to administrative costs to protect central bank financial autonomy.
- Examples: In some Scandinavian countries, politicians are members of supervisory boards but democratic traditions and acceptance of central bank autonomy help focus these boards on supervisory responsibilities.
- Outcome: A properly designed supervisory board—bearing in mind country specific conditions—can both entrench autonomy delegated to the central bank and strengthen its credibility.

### Audit committees
- Role: assist in performing the supervisory function; mainly an Anglo-Saxon corporate tradition for single-board entities; provide special expertise on internal control and financial disclosure.
- Legal prevalence: Only a few surveyed central bank laws (e.g., Cambodia and Nepal) formally require an audit committee.
- Practice examples: Central Bank of Bosnia and Herzegovina and Portugal have adopted similar practices though roles vary (Portugal’s board of auditors covers functions of both an audit committee and supervisory board).
- Alternatives and safeguards: contracting specialist expertise via an audit committee can be useful even for small boards, but safeguards must ensure central bank autonomy.

### Management
- Primary responsibility: day-to-day operations of the central bank.
- Delegation: In 78 percent of the surveyed laws, day-to-day responsibility is delegated to one person (commonly titled governor, chairman, president, or general manager).
- Typical support: governor assisted by deputy/vice governors, a general manager, or a management board comprising directors of key departments.
- When established in law: management board usually comprises the governor, deputy governor(s), and sometimes department directors.

### Boards Performing Several Functions
- Prevalence of single-board systems: 63 percent of the surveyed central bank laws have one board that often performs multiple functions.
- Functional patterns:
  - Goal or target autonomy + one board: performs policy, implementation, and supervisory functions.
  - Instrument autonomy + one board: often performs implementation and supervisory functions.
- Coordination benefits: management boards that also play roles in policy/implementation can help set realistic targets.
- Risks and conflicts:
  - Supervisory boards that also act as policy or implementation boards may create incentives to set less ambitious targets to facilitate apparent over-performance.
  - Specialized boards (e.g., Australia’s Payment System Board) can address specific expertise needs and resolve conflicts by law-defined mechanisms.
- Design guidance: tasks and authority of specialized boards must be clearly and consistently defined in law, including conflict resolution when responsibilities overlap.

### Important elements of boards and management

  #### Size of boards
  - Balance requirement: enough members for an informed, balanced, professional view while small enough to remain effective and avoid dilution of responsibility.
  - Typical sizes: Most policy boards have seven to nine members (Table 5). Supervisory and advisory boards often have broader representation. Management boards tend to be smaller for quicker decisions.

  #### Chairmanship of boards
  - Powers of chairman: call meetings, influence agenda, and often cast a deciding vote in ties.
  - Practice: governor is always chairman of a management board, usually chairman of an implementation board, and in most cases chairman of a policy board.
  - Exception: In pure supervisory boards, the governor should not be chairman.
  - Survey finding: In 74 percent of the cases, the governor is also chairman for the supervisory board—raising risk of blurred oversight and management roles.

  #### Meeting procedures
  - Voting: decisions often require a majority; some require a qualified majority. Quorum rules often designed to require presence of nonexecutive directors.
  - Government representatives: may participate but often should not have voting rights on implementation boards to avoid recreating inflation bias.
  - Decision culture: consensus and collective responsibility are common; charismatic governors may dominate, using other members mainly as advisors.
  - Liability: members usually collectively liable for decisions; dissent must be recorded in minutes to avoid liability.
  - Frequency:
    - Supervisory boards: less frequent—say quarterly and when needed.
    - Policy boards: may meet quarterly or monthly; monthly if also functioning as implementation board.
    - Management boards: often meet weekly or every fortnight.
    - Example: Paraguay’s board of directors must meet at least weekly and makes implementation, management, and supervisory decisions.
  - Minutes and transparency:
    - Practices vary: minutes sometimes secret unless board decides otherwise.
    - In goal-autonomy regimes, publishing minutes may be required to inform public about priorities.
    - King (2002) finds that publishing minutes for the Bank of England’s Monetary Policy Committee helped create wider understanding of issues discussed.

  #### Composition of boards
  - Government representatives:
    - Many laws allow government/legislature representatives on boards; in most cases the minister of finance or a representative may participate in meetings, and in almost half of these cases this member does not have voting rights (Table 6).
    - Some laws permit a representative to postpone a vote to the next meeting to resolve conflicts.
    - Increasing tendency: prohibit government officials having voting rights on boards, allowing only participation for coordination.
  - Representation requirements: most laws stipulate balanced membership; a few explicitly require sectoral or regional representation (examples: Botswana, Switzerland, Tanzania, United States, Belgium, Pakistan).
  - Employee representation examples: Austria, France, and Norway allow staff representatives in specified circumstances.
  - Conflict of interest controls:
    - Newer laws emphasize autonomy and that the central bank acts only according to its law; provisions allowing tasks “as determined by other laws” should be constrained to tasks consistent with central bank law to avoid quasi-fiscal obligations.
    - Restrictions: prohibit governors/deputies from board membership of institutions supervised by the central bank; membership as a full-time position and forbidding membership on other financial institution boards helps avoid insider-information conflicts.
    - Many laws prevent financial or familial conflicts of interest (examples cited: Paraguay, Peru, Spain, Peru asset declarations).
    - Political activity: some laws restrict membership in political parties or leading roles in parties (examples: Romania, Nepal, Paraguay, Armenia).

  #### Nomination, appointment, and dismissal
  - Qualification requirements:
    - Professional skills commonly required: experience in banking, finance, economics, law; in some cases accounting, auditing, international trade.
    - Some laws specify practical experience duration for governor/deputies (examples: Cape Verde, Venezuela, Philippines, Namibia, Cambodia, Belgium, Papua New Guinea).
    - Citizenship often required.
    - Fit and proper standards: “good moral standing,” “good moral character,” or “unquestionable integrity”; criminal convictions, bankruptcy, pending tax obligations, or matured/current obligations with financial institutions can disqualify (examples: Botswana, Peru, Bolivia).
  - Double-veto arrangement:
    - A double-veto (nominator and a separate appointer) is recommended to depoliticize appointments but can create stalemate; some countries include time limits to avoid stalemates.
    - Survey finding: about 60 percent of the governors have some type of double-veto arrangement in place (Table 7). For other board members, about half of surveyed laws include double-veto arrangements (less so for supervisory boards; Table 8).
    - Nomination practices: some nominators produce lists (often about three candidates); governors may nominate deputy governors or management board members.
  - Remuneration:
    - Profit sharing is generally inappropriate for central bankers; two surveyed central bank laws allow profit sharing.
    - Performance-based remuneration for board members is generally avoided; some performance bonuses used for staff depending on function.
    - Example: Reserve Bank of New Zealand 1989 Law discussion led to allowing minister of finance to dismiss governor if inflation target breached rather than performance bonuses.
    - Recommendation: central bankers should be paid salary related to private sector levels; if board sets salary, government veto may be useful but remuneration should not be changed to member’s disadvantage during term.
  - Legal immunity:
    - Legal immunity for actions taken in good faith is considered good practice and included in many standards (e.g., Core Principles for Effective Banking Supervision).
    - Example: Bahamas provides protection for directors acting bona fide under the central bank law.
    - Some laws specify liability for actions breaching legal provisions (example: Australia under Companies Act).
  - Removal and dismissal:
    - Protection against arbitrary dismissal is key for autonomy; breaches of qualification requirements, serious misconduct, or gross negligence usually justify dismissal.
    - Reappointment is the occasion where performance often matters.

*Source: Selected central bank laws and survey evidence presented in chapter text.*

### 1973. In Papua New Guinea, salary allowances and benefits for the governor are fixed by the national

### _wp04226 - 1973. In Papua New Guinea, salary allowances and benefits for the governor are fixed by the national

### Appointment, remuneration, and institutional practice
- Papua New Guinea: salary allowances and benefits for the governor are fixed by the national parliament following considerations of the Salaries and Remuneration Commission, which is mentioned in the constitution.
- Fiji: the salary of the governor is set from time to time by the Higher Salaries Commission.
- One central bank law stipulates that fees for board members should be comparable with central banks in the region, but it is not clear if this provision is observed.
- Philippines: the remuneration of the Governor and non ex officio members is fixed by the President of the Philippines at a sum commensurate to the importance and responsibility of the position.
- Kuwait: the governors’ salary is fixed by Council of Ministers on recommendation of the Ministry of Finance.

### Dismissal, safeguards, and nomination importance
- In some countries, board members can be dismissed if significantly harming the interests of the bank; other board members usually play an important role in assessing such incidents.
- In a few cases dismissal may be delegated to a special tribunal or left to the highest court, provided the judicial system is truly independent.
- Another safeguard is to require a dismissal be approved by the legislature to inform the public if the president, cabinet, or minister of finance tries to exert undue influence.
- Peru: members of the board can only be dismissed in case of a crime or serious misconduct and the resolution must be adopted by two-thirds of the members of the Congress.
- Because dismissal should be difficult, nomination and appointment procedures are particularly important.

### Terms of selected board members (summary findings)
- The term for titular members of boards is fixed in most central bank laws.
- Recommendation: have terms longer than the term of the body with the predominant influence on the appointment to reduce undue influence from reappointment concerns.
- The term of the governor is in most cases fixed and in many cases longer than the term of the other non–ex officio members.
- The survey finds that if the term is fixed, it is often around five years (Table 9).
- Note: Terms of governors, which may differ from non-exofficio members, are not included in Table 9.

### Table 9 (high-level observations from text)
- Survey covers: 101 central bank laws, covering 113 countries (design of governing boards and management).
- Typical patterns indicated by the text:
  - Management board terms usually a little longer; advisory boards shorter.
  - Federal Reserve System (United States): Board of Governors consists of seven members appointed by the President with advice and consent of the Senate for a term of 14 years; the chairman is designated by the President with the consent of the Senate for a term of four years.
  - Long terms require stricter provisions regarding dismissal for gross misconduct and negligence.
  - Some central bank boards have terms of three years or shorter.
  - Relatively few central banks do not specify a term; in some such cases the governor may in effect have an unlimited term.
  - Denmark example (footnote): terms of office of members of the Board of Governors are indefinite, but required to retire at the age of 70 years; a former chairman was in office from 1965 to end-1994.

### Vacancies and staggered terms
- Staggered terms are considered good practice to ensure continuity.
- Staggered terms: explicitly required in about 20 percent of the surveyed laws (exclusion: management and advisory boards).
- Staggered-term practice: if a position becomes vacant during the term, a new appointment only lasts for the remaining period of the term.
- If staggered terms are not explicit, a new appointment is often for a new full term.
- A few laws stipulate a period within which a vacancy shall be filled to ensure a quorum.

### Subsequent service restrictions
- Relatively few, but mainly newer, central bank laws include provisions regarding subsequent service.
- Spain and the Philippines are cited as examples where subsequent service provisions exist.
- Philippines: no member of the Monetary Board may be employed in a bank or financial institution within two years after the term has expired, except as an official representative.
- Rwanda and Spain: law also addresses the remuneration during this subsequent-service period.
- In some countries, similar requirements may be covered by other legislation or rules governing central bank officers, particularly if they are considered civil servants.

### Conclusion: principles and policy guidance for central bank governance
- Good central bank governance: objectives, tasks, and functions delegated to the central bank are achieved effectively and efficiently.
- Legal framework should ensure consistency between autonomy, authority, and accountability as a balanced base to accomplish objectives, tasks, and functions.
- There is less consensus on the type of autonomy to be delegated; autonomy design is affected by country-specific factors (degree of economic and financial sector development, history, political system, judicial traditions).
- Survey findings on governing bodies (101 laws, 113 countries):
  - About 63 percent of the surveyed laws have one board.
  - 78 percent of the surveyed laws: the governor has the sole responsibility for the management of the bank; in the other countries a management board exists.
- The empirical findings only partially supported a priori expectations because governing bodies often have overlapping functions and de jure structure may differ from de facto practice.
- Governance structure in a number of countries may be lagging the trend toward central bank autonomy and accountability.

### Issues to consider when designing governing bodies and management (policy recommendations)
- Distinguish types of autonomy (goal, target, instrument, limited or no autonomy) to define functions of boards and management; consider country-specific factors when determining number, size, and composition of bodies.
- Balance simplicity of board structure with potential complexity of board composition; small boards are decisive but concentrate responsibility.
- Policy boards should be sufficiently broad to ensure an informed, balanced, and professional view while avoiding excessive size; consider inclusion of outside members with special expertise provided autonomy is not encroached.
- Implementation/target boards should comprise highly qualified members, generally full-time directors; external members may be considered if autonomy is preserved; government representatives with voting rights should not participate in boards deciding how to implement a target.
- Supervisory boards should have a majority of nonexecutive or outside members; government representatives on supervisory boards are more acceptable provided autonomy is not adversely affected.
- Governor should not be chairman of a pure supervisory board but should be obliged to be present to answer questions; clear separation of duties is important.
- Responsibilities of governing bodies and management, including fiduciary objectives, should be clearly defined in law, especially when functions overlap.
- Use of committees can help include external members and segregate decision authority, but must not dilute governing bodies’ responsibilities; audit committees useful where no supervisory board exists or where one-board systems primarily serve policy functions.
- Nomination and appointment procedures, along with safeguards against undue influence, are likely more important for good governance and performance than incentives that may move priorities from fiduciary responsibilities to personal motives.

*Source: Selected central bank laws.*

### chapter 12 in Frameworks for Monetary Stability, ed. by Tomás J.T. Baliño and Carlo

### chapter 12 in Frameworks for Monetary Stability, ed. by Tomás J.T. Baliño and Carlo Cottarelli

### MAIN GUIDELINES ON CENTRAL BANK AUTONOMY AND ACCOUNTABILITY (APPENDIX I)
- Objectives and targets
  - "Price stability, as the best contribution monetary policy can make to balanced sustainable growth, is the preferable formulation for the primary objective."
  - "A specific target—which could, for example, involve explicit inflation targets, maintenance of a fixed exchange rate, or monetary aggregate targets—should be established and published."
  - Targets may be determined by the central bank ("target autonomy"); or determined by the government in agreement with the central bank ("instrument autonomy").
  - "To facilitate accountability, the target(s) should be easy to monitor."
  - "Consideration should be given to explicit, but limited 'escape clauses' in the face of significant exogenous shocks."

- Monetary policy
  - "A central bank should determine and implement monetary policy to achieve its target."
  - The central bank should have authority "to determine quantities and interest rates on its own transactions without interference from the government."

- Conflict resolution
  - "A clear and open process should be established to resolve any policy conflict between the central bank and the government."
  - If the central bank is overruled or its effectiveness is significantly limited by government policies, "It should be absolutely clear ... that responsibility for the results lies with the government, not the central bank."
  - Example procedure: where international reserves decline to levels insufficient to conduct international transactions due to factors outside the central bank’s control, the central bank "shall make recommendations to the government. If the government does not react within a specified period, the central bank should notify the general public that it temporarily cannot be held accountable for price stability due to factors outside its control."

- Governor
  - "Nomination and appointment/confirmation of the governor should be by separate bodies to provide some measure of balance, bearing in mind the institutional framework."
  - "The term should be longer than the election cycle of the body with the predominant role in selecting the governor."
  - "Dismissal should be only for breaches of qualification requirements, or misconduct; lack of performance could also be grounds if clearly defined in terms of the primary objective and specific targets."
  - Performance-based dismissal could be subject to "a suitable and independent judicial procedure, and perhaps be with the consent of the legislature."

- Board
  - "Composition of the board should ensure a reasonably well informed and balanced view, but avoid conflicts of interest."
  - "The highest level board should include a majority of nonexecutive, non-government directors."
  - "Direct government representatives should be eliminated from a policy board and probably also from a monitoring board."
  - If a government representative participates in a policy board, "it should at least be without the right to vote (though it might be with a limited, temporary veto power)."
  - "Nomination and appointment/confirmation should be by different bodies; terms should be longer than the election cycle of the main body in the appointment process, and should be staggered; and dismissal of board members should occur only for breaches of qualification requirements and misconduct, and on performance grounds only if clearly defined."
  - Performance dismissal "could be ruled upon according to a suitable and independent judicial procedure, and be with the other board members’ prior consent."

- Credit to government
  - "If not prohibited, direct credit to the government should be carefully limited to what is consistent with monetary policy objectives and targets."
  - Temporary advances and loans could be allowed only if: (i) "they are explicitly limited to a small ratio of average recurrent revenue of preceding fiscal years (say, 5 percent); (ii) they bear a market-related interest rate; and ideally (iii) they are securitized by negotiable securities."
  - "The central bank should not underwrite and participate as a buyer in the primary market for government securities, except with noncompetitive bids and within the overall limit for credit to government."
  - "Indirect credit to the government, that is, buying outright existing government securities held by the market, or accepting them as collateral, should be guided by monetary policy objectives."
  - "The central bank should not finance quasi-fiscal activities."

- Exchange rate policy
  - "Basic consistency needs to be ensured between the exchange rate and monetary policy."
  - If exchange rate policy is not solely the responsibility of the central bank, the bank should "have sufficient authority to implement monetary policy within the constraint of exchange rate policy" and "should be the principal advisor on exchange rate policy issues."
  - "In the event of a conflict with the government on exchange rate issues, the conflict resolution procedures as stated above should come into effect."

- Financial conditions
  - The law should ensure the central bank "has sufficient financial autonomy to support policy autonomy, but with matching financial accountability."
  - "Its budget should not be subject to normal annual appropriation procedures (but could be subject to a longer-term appropriation—e.g., on a cycle consistent with the term of the governor)."
  - "Only realized net profits, after prudent provisioning by the central bank and appropriate allocations to general reserves, should be returned to the government."
  - "The government should ensure the solvency of the central bank by transferring interest bearing negotiable securities if the authorized capital is depleted."
  - The body to which the central bank is accountable "should be allowed to ask external auditors and the auditor general to review the central bank’s accounts and procedures."

- Publication and reporting
  - "Policy and financial accountability should be clearly established."
  - The central bank should prepare formal statements on monetary policy performance "at, say, six-month intervals, without prior approval by the government."
  - These statements "should be forwarded to both the executive and the legislature and should be published for the benefit of the public."
  - "Annual financial statements audited by external auditors should similarly be forwarded and published."
  - "Summary balance sheets should be published more frequently (e.g., on a weekly or monthly basis)."

- Source attribution for the guidelines
  - "Source: Lybek (1998 and 1999)."

### CENTRAL BANK LAWS COVERED IN THE SURVEY (APPENDIX II)
- Appendix II provides a country-by-country listing of the central bank laws covered in the survey. Representative entries (country — name of the law) include:
  - Angola — "Law of the National Bank of Angola of April 23, 1997"
  - Argentina — "Charter of the Central Bank of the Argentine Republic, Law 24,144 of September 23, 1992, amended as of September 2003 (Law 25,780)"
  - Australia — "Reserve Bank Act, Act No. 4 of 1959 as amended on July 11, 2002"
  - Brazil — "Central Bank Law of Brazil, Law No. 4595/64 of December 31, 1964, amended as of May 31, 2000"
  - Canada — "Bank of Canada Act, R. S. 1985, with amendments to 2001"
  - China, P.R. — "Law on the People's Republic of China on the People's Bank of China of March 18, 1995"
  - European Economic and Monetary Union — "Protocol on the Statute of the European System of Central Banks and of the European Central Bank"
  - France — "Statute of the Banque de France, last amendment — Act 98-357 of 12 May 1998, amended as of Sept. 17, 2000"
  - Japan — "The Bank of Japan Law of June 11, 1997, last amendment - January 6, 2001"
  - Mexico is not listed among the sample excerpted entries in the supplied content; the full Appendix II in the chapter continues with many other countries through Zambia — "The Bank of Zambia Act, Act No. 43 of 1996 of December 12, 1996."

- Footnotes and grouping notes included in Appendix II (preserve exact wording)
  - "1/ Currently in the process of amending the central bank law."
  - "2/ The members of the European Monetary System—defined as the European Central Bank plus the national central banks that have adopted the euro—include: Austria, Belgium, Germany, Greece, Spain, Finland, France, Ireland, Italy, Luxembourg, Netherlands, and Portugal."
  - "3/ Members of Central Africa Monetary Union include: Cameroon, Central African Republic, Chad, Congo, Equatorial Guinea, and Gabon."
  - "4/ Members of West African Monetary Union include: Benin, Burkina Faso, Cote d'Ivoire, Guinea Bissau, Mali, Niger, Senegal and Togo."
  - "5/ The Act on the National Bank of Poland was amended on December 18, 2003, which entered into effect on January 1, 2004. The most recent amendment of the Act was adopted on April 20, 2004."
  - "6/ Member of the Cooperation Council of the Arab States of the Gulf (GCC). GCC members include: Bahrain, Kuwait, Oman, Qatar, Saudi Arabia, and United Arab Emirates."

*Source: chapter 12 in Frameworks for Monetary Stability, ed. by Tomás J.T. Baliño and Carlo Cottarelli (appendices and selected references as provided).*

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_Source: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/wp/2004/_wp04226.pdf_