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Faculty of Economics

By Valerie Chuang

Last year, the International Monetary Fund (IMF) introduced the Central Bank Transparency Code. Dr. Petra Geraats, a Cambridge economist who served on the High-Level Advisory Panel alongside nine former central bank governors and board members, explains in an interview with Valerie Chuang that the update was widely welcomed and long overdue.


Dr. Petra Geraats

The CBT succeeds the Monetary and Financial Policies Transparency Code (MPFT), which was published in 1999. In the two decades since, central banks’ roles and responsibilities have changed dramatically, as have international standards for financial policies.

Geraats recounts how many advanced economies began pursuing unconventional monetary policies such as quantitative easing and forward guidance following the 2008 financial crisis. The fallout from the crisis also saw the broadening of central banks’ mandates: today, many are responsible for macroprudential oversight. These developments, alongside the establishment of international standards for central bank functions like micro-prudential supervision and securities regulation, necessitated a revised transparency code.

The new CBT is comprehensive in scope, covering transparency in every area of central banking through its five “Transparency Pillars”, pertaining to central bank governance, policies, operations, outcomes, and official relations. Under each pillar, the Code formulates general principles and describes practices ranging from “core” to “expanded” to “comprehensive”, which will help to inform central banks’ transparency arrangements. In addition to expanding transparency standards, the CBT eliminates the overlap between the MFPT and the transparency elements of other already updated financial policy standards.

The CBT also addresses the tension between transparency and central banks’ need for confidentiality. “Central banks regularly deal with market sensitive information, or information with respect to financial stability. They clearly do not wish to be fully transparent in these respects,” Geraats explains. “This need for confidentiality extends to other areas, such as foreign exchange intervention, reserve management, and emergency liquidity support. You would not want to prematurely reveal that you are providing liquidity support to individual financial institutions, because that could make a bad situation even worse.” The CBT deals with this matter through the principle of confidentiality, which acknowledges that central banks have legitimate reasons to maintain confidentiality, but calls for a clear articulation of the reasons behind such confidentiality.

The CBT applies to all IMF member countries, regardless of region, income level, or exchange rate regime. It acknowledges that countries operate in a variety of institutional contexts, and for that reason provides a range of practices which can be adapted to country-specific circumstances. “The Code is deliberately very broad, and not normative,” says Geraats. “Central banks will be able to use the Code as a diagnostic tool to assess how they are doing, and how they could potentially improve transparency in the areas where they desire to do so. Ultimately, it’s up to each central bank to decide how it wishes to use the Code.”

While it is early days to evaluate the impact of the CBT, the importance of central bank communications policy has long been recognised by policymakers and academics. One reason is that central bank communications enhance transparency, which in turn facilitates accountability and helps shore up public and political support for central bank independence. Central bankers make far-reaching policy decisions despite being unelected officials, so robust public accountability is vital for central banks to avert a democratic deficit in monetary policymaking.

Another reason is that central bank transparency tends to enhance the effectiveness of monetary policy. For instance, central banks that set a quantitative, well-defined goal for inflation help to stabilise long-run inflation expectations and thereby reduce inflation volatility. Greater transparency in the form of published macroeconomic forecasts and monetary policy meeting minutes also make central bank actions more predictable. As a result, monetary policy can have an effect even before it is implemented, as it becomes anticipated and priced into financial markets.

Geraats knows a thing or two about central bank transparency and communications. She first began research in this field as a PhD student at UC Berkeley, when debates about the then-newly established ECB’s strategic direction captured her attention. At the time, research on transparency and communications was sparse, and what little research did exist seemed to suggest that greater opacity was desirable. Geraats’ work has helped to overturn this notion, and the index for monetary policy transparency she initiated remains widely used today. Her contributions extend beyond the academic sphere. In addition to guiding the development of the IMF’s CBT, Geraats has participated in several evaluations of central banks. Most recently, she sat on an independent evaluation panel which assessed the monetary and financial policies of the Central Bank of Chile.

The Central Bank of Chile, like the vast majority of central banks, has become more transparent about its conduct of monetary policy over the last two decades. Geraats has documented the different ways in which central banks have adopted greater openness. During the early 2000s the publication of numeric macroeconomic forecasts quickly gained ground, partly reflecting the adoption of inflation targeting by an increasing number of central banks. The second half of the decade was dominated by the 2008 financial crisis, which saw policy rates being cut to unprecedentedly low levels. Greater transparency about policy decisions, by way of policy explanations and forward guidance, received further impetus as central banks discovered that such transparency-enhancing measures could make their policy interventions more effective. With the Covid-19 crisis again presenting tremendous challenges for central banks, the IMF’s new CBT offers some hope and guidance for the difficult months that lie ahead.



Central Banks


Monetary Policy

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