Download Central Banks and Democracy

Central Banks and Democracy
Words as attractors
Gianfranco Tusset
Francesco Cendron
Central banks … democracy
• The paper deals with both governance and
monetary policy, but focusing on a particular
feature: democracy. Why?
• Starting point:
“It is the general public that gives central banks
their democratic legitimacy, and hence their
independence.” (Blinder, Ehrmann, Fratzscher,
De Haan, and Jansen) (2008)
We are interested in:
• not in a formal concept of democracy →
national central bank in relation to its
parliament or political power;
• a substantive concept of democracy → central
banks are progressively concerned about their
relationships with the general public;
• how central banks react directly to public
opinion.
Before going into depth with central
banks/democracy …
• Factors influencing central banks’ evolution,
change or choices:
1. internal research;
2. academic theory;
3. imitation;
4. economic shocks;
5.economic changes
6. internal bureaucracy;
7. Governor/President personality.
Before going into depth with central
banks/democracy …
• It is very difficult to trace each central banks’
change back to its cause.
• Moreover, the common belief affirming that
theory is the main guide of central banks’
choices must be demonstrated.
• Also for this, we have chosen a synthetic
method that does not distinguish among
causes.
Democracy …
• Central banks behave democratically? We can
answer assuming a formal concept of
democracy. But this is not the point.
• Is democracy a resource to easily reach
monetary and economic objectives? YES.
How can democracy/central banks be
investigated: the prevailing approach
• a1) democracy as popular will, i.e., only the elects
can decide or appoint to decide; a2) democracy is
firstly defense from the power excesses that the
executives may wield on central banks.
• Really, the two points have been interwoven in a
unique big question concerning the relationship
between political power and central banks, that
of the independence of the central banks.
How can democracy/central banks be
investigated: our approach
• central banks’ positions as they have been
concretely presented by the bankers
themselves;
• speeches of central bankers from 1997 to
2013 → how did the position of central banks
change with regard to the above issues of
democracy?
• both textual and theoretical analysis .
Our approach …
• We have made use of a multivariate statistical
technique known as "correspondence analysis"
and relevant technology (Spad, Taltac, etc).
• This method reveals meaningful patterns of
communication, thus showing different styles for
different central bankers.
• Briefly, our research takes into consideration
democratic legitimacy of central bankers' powers
and their significance in a democratic society.
Our approach …
• We are also interested in grasping how much
rhetoric weights.
• Finally, if a practice as transparency is
considered ‘democratic’, can it be given up…?
Early outcomes …
Factor 2
1.0
0.5
Y07
Y08
Y06 Y05
Y04
Y09
Y10
Y11
0
Y03
Y02
Y01
Y00
Y99
Y97
Y98
Y12
Y13
-0.5
-1.0
-1.0
-0.5
0
0.5
1.0
Factor 1
From 1997 to 2013 …
Factor 2
lisbon agenda
market turmoil
1.0
implementation of basel
market turbulence
islamic financial
pension fund
middle east
sub prime
labour productivity quantitative easing policy
islamic banking
hedge fund
swiss national bank
jean claude trichet
oil prices
monetary analysis
market liquidity
potential output
money laundering
money and credit
commercial banks
global imbalances
0.5
nominal anchor
communication risk management
islamic management
finance
liquidity
norwegian
economy
Y07
Y08
Y06 Y05
risk measurement
housing market
transparency
global economy global growth
economic expansion
financial system
interest rate
financial institutions
Y04
labour market east asia
financial sector price stability
financial stability
inflation targeting
Y03
economic
activity
Y09
united states
0 feedback emerging economies risk aversion
adverse
inflation target stock market
industrial countries
lehman brothers economic downturn balance sheet Y10federal reserve bank monetary policy
monetary aggregates
Y02
financial regulation stress tests capital requirements Y11
interest
rates
repo rate
international financial fixed exchange rate
exchange rate Y01 Y00
advanced countries global financial great depression Y12 federal reserve
southeast asia monetary growth
monetary stability
exchange rates
advanced economies
financial crisis public finances Y13 new york
Y99
New Zealand convergence criteria
low
inflation
balance
of
payments
maturity transformation fiscal consolidation public debt
unemployment rate
maintenance of price stability
Y97
economic governance
banking supervision
economic recovery
too big lessons from the crisis
national currencies new technology
micro
prudential
fiscal policy economic policy Y98 rate of inflation
-0.5
risk board accommodative monetary policy monetary easing
money stock
bank of japan south africa
money supply
post crisis pre crisis quantitative easing
monetary union
harmonised
index of consumer
bank s view
lower bound
mobile banking
monetary conditions
long term capital american economy
hong kong
shadow banking
balance sheet adjustment
european monetary union maastricht treaty hong kong dollar
lehman shock
monetary co operation
volcker rule debt problem
monetary targeting
european stability mechanism
currency board
-1.0
minimum exchange
official discount rate
stored value
-1.0
-0.5
0
0.5
1.0
Factor 1
From 1997 to 2013 …
Factor 2
independent authority
qualitative criteria
quantitative aspects
qualitative assessment
central bank s communication
monetary credibility
smooth participation
ensuring transparency
transparency
and
credibility
central
bank
transparency
1.0
effectiveness and credibility
credibility of central bank quantitative terms
transparency and communication communication policy
inflation fighting credibility
national accountability independent board qualitative aspects
importance of communication
central bank communication good communication central bank credibility
stability and credibility qualitative factors
participation
democratization quantitative tools public credibility monetary independence transparent monetary
government accountabilitypublic
socially responsible
credibility of the ecb
time of independence
quantitative assessment central bank s credibility
credibility of monetary policy
quantitative impact autonomy and independence communication and transparency
0.5
imperfect credibility
quantitative analysis
quantitative techniques
communication policy credibility bank s credibility transparent monetary policy
democratic principles
Y07
independence and credibility effective communication
Y08
transparency quantitative monetary quantitative definition
Y06
uncertainty
transparent communication qualitative information
fully accountable Y05
independent banking high degree of credibility
financial
independence
inflation
credibility
credibility of our commitment
active participation Y04
institutional independence instrumental independence
accountability of central banks
independent community bankers democracy
independent monetary policy credibility of the monetary policy
Y09 democratic institutions transparent credibility and effectiveness
knightian uncertainty
democratic deficit
quantitative approaches transparency accountability
0
credibility and reputation participation
strong and independent
accountability of monetary policy democratic government
Y10
Y03
clear communication
accountability
Y02
lack of credibility responsibility and accountability
consensus Y01
democracies democratic accountability Y11 economic uncertainty
confidence and credibility public accountability
Y00
Y12
credibility
of
the
inflation
target
full independence democratically elected
efficiency and transparency held accountable Y99 stability and the independence independent bank
quantitative
and
qualitative
fully independent
Y13 democratically
credibility and independence central bank accountability
international consensus
democratic legitimacy
degree of independence independent monetary
democratic
system
intellectual consensus
accountability to the public
instrument independence
Y97
-0.5
bank s independence
bank participation independent central bank
Y98 held accountable for
irreducible uncertainty accountability mechanisms
accountability of the central bank
responsible
monetary
quantitative
targets
lack credibility
consensus on monetary policy
central bank accountable
democratic process
reputation and credibility
consistency
and transparency
legitimacy
and accountability
transparency and information independence and transparency
democratic
control
market consensus
most transparent central bank s accountability
accountability framework public transparency
transparent and accountable
credibility and transparency
independence and accountability
-1.0 legitimacy and accountability
democratic
-1.0
-0.5
0
0.5
1.0
Factor 1
The central banks …
Factor 2
New Zealand
3.00
norwegian economy
norges bank
2.25
New_Zealand
interest rate differential
nordic countries
cash rate
1.50
Norway
terms of trade
south africa price inflation
inflation targeting South_Africa
low inflation
pension fund
inflation target
repo rate sveriges riksbank
fixed exchange rate
interest rate
executive board
exchange rate
economic policy
labour market
Canada
Uganda
Thailand Kenya Australia Chile
Sweden
monetary policy
Mauritius
Brazil
Denmark
England
Nigeria
China
Botswana Turkey
Indonesia
India
Switzerland
labour productivity
0
Korea
maximum
employment
Finland
maastricht treaty
risk management balance sheet
Italy
cross border public finances
Philippines Mexico
holding companies
monetary union money and credit
financial institutions Saudi_Arabia
Bundesbank
Spain
dual mandate
Japan
structural reforms european integration
price stability
federal reserve system unemployment rate
Netherlands
economic governance
Pakistan
France
ECB
Singapore
home equity labor productivity
USFRS
stability and growth stability oriented
United_Arab_Emirates
united states
federal deposit insurance
market
participants
new york
0.75
interest rates
federal funds federal reserve bank
-0.75
risk measurement
federal reserve board safety and soundness
board of governors
federal reserve federal open market committee
-1.50
-0.75
0
fiscal policies european
euro areacentral bank
key ecb interest rates monetary analysis
monetary developments jean claude trichet
european parliament
0.75
1.50
Factor 1
These figures reveal:
• Central banks’ lexicon changes;
• Central banks can be grouped according to the
vocabulary they use;
• The concept of democracy must be subarticulated.
We are interested in:
The four ‘pillars’ of democracy into central bank
discourse:
• Independence;
• Transparency;
• Accountability;
• Credibility.
• We started from ‘transparency’ because, as
Barry Eichengreen (2008) wrote:
“transparency represents the most dramatic
difference between central banking today and
central banking in earlier periods.”
Speeches: transparency
Factor 2
ensuring transparency
central bank transparency
1.0
transparency and communication
democratization
0.5
transparent monetary
transparent communication
Y07
Y08
democratic principles
democratic deficit
Y09
Y10
Y11
0
Y06
transparency
Y05 communication and transparency
Y04
transparent monetary policy
Y03
Y12
Y13
consistency and transparency
Y02 accountability and transparency
enhance the transparency
democratic government
Y01
democratic society
transparency
and
accountability
Y00
efficiency and transparency
transparent and accountable
Y99
improving the transparency
Y97
democratic system
accountability of the central bank
Y98
-0.5
transparency and information
democratic legitimacy and accountability
public transparency
independence and transparency
democratic control
credibility and transparency
-1.0
-1.0
-0.5
0
0.5
1.0
Factor 1
Speeches: transparency
Speeches: transparency
Factor 2
3.00
2.25
New_Zealand
1.50
Norway
democratic government
0.75
0
South_Africa
Uganda Canada democratic deficit transparent monetary
democratic control
Thailand
central bank transparency
Kenya Australia Chile
Sweden transparency and communication
public transparency
transparency and information
Mauritius
Brazil
Denmark transparent monetary policy
Nigeria England
independence and transparency China
Botswana Turkey
Indonesia
India
Switzerland
Korea
Finland democratic system
democratic principles democratic society
transparency
Italy
transparency and accountability
Philippines
communication and transparency
Mexico
transparent and accountable
Bundesbank
Spain
accountability and transparency Saudi_Arabia
Japan
consistency and transparency
Netherlands France
democratization
Singapore Pakistan
ECB ensuring transparency
USFRS
United_Arab_Emirates
accountability of the central bank
improving the transparency
-0.75
-1.50
-0.75
credibility and transparency
efficiency and transparency
enhance the transparency
0
transparent communication
democratic legitimacy and accountability
0.75
1.50
Factor 1
Speeches: transparency
Economic theories on transparency
25
Ranking
20
20
19
18
17
16
15
15
14
13
12
11
10
10
9
8
7
6
5
5
4
3
2
1
0
1994
1996
1998
2000
2002
2004
2006
2008
2010
2012
Year
-5
Economic theories on transparency
• First point: theory probably follows speeches.
• Certainly, theoretical debate on transparency
and central banking does not precede
discourses on transparency by practitioners.
First speeches, then theories
• How did transparency appear and become a
strategic issue in central banking?
• We first consider the side of the speeches.
• Analysis of co-occurrences: “two (or more)
words that tend to occur in similar linguistic
contexts (i.e. to have similar co-occurrence
patterns) tend to resemble each other in
meaning.” (Lancia 2005)
Chronology
• 1997-2000: transparency and independence;
• 1998-2004: transparency and inflation targeting;
• 2003-2007: transparency by means of standards
and codes;
• 2005- : transparency and financial markets;
• 2007- : level and second thoughts about
transparency;
• 2008- : transparency and crisis.
Independence and transparency
• “Independence requires openness a very
important part of our strategy … is openness and
transparency as to how monetary policy is
conducted. This part can hardly be reconsidered.”
(V. Bergstr, Sveriges Riksbank, 2000)
• “Essential preconditions for the independence of
a central bank include a solidly based consensus
concerning its mandate and a commitment to
transparency and accountability.” (B. Gehrig,
Swiss National Bank, 2000)
Independence and transparency
• In 2001, Roger Ferguson (Fed): “transparency
relates broadly to the openness of a central
bank in stating its monetary policy decisions
and explaining the reasoning behind them”.
(2001)
• This was opposed to ‘mystique,’ that is, the
then attitude of the central banks operating
with considerable secrecy.
Independence and transparency
• Transparency towards, first, political power and
elected:
• “The need for accountability on the part of
independent central banks calls for transparency
in monetary policy and consistent communication
with the public … a clear definition of the
ultimate goal communication of the monetary
policy strategy; publication of the data used in
decision making; consistent substantiation of
policy decisions.” (A. Weber, President of the
Deutsche Bundesbank, Warsaw, 2006)
Transparency and inflation targeting
• Transparency became both a goal and a tool
of monetary policy with the spreading of the
inflation targeting approach.
• It was a goal, because the central bank has to
be accountable towards political power.
• But transparency started to be considered also
a tool when, later, it became clear that
transparency allows to reach further
objectives of monetary policy.
Transparency and inflation targeting
• “It is truly remarkable how much has changed
over the past decade. The mystery and
mystique has given way to transparency and
openness.” (M. King, Deputy Governor of the
Bank of England, Boston, 2000);
Transparency and inflation targeting
• “The rise to prominence of inflation targeting, on
the one hand, and transparency, on the other,
reflect the central importance of expectations in
our models of economic behavior. “ (King, 2000)
• Inflation targeting was based on transparency,
which began a condition for the monetary policy
success.
• Features as independence, credibility
accountability and transparency appeared clearly
interconnected.
Transparency and inflation targeting
• “The migration of academic economists to inflation
targeting is nothing compared with the migration of
actual real world countries to inflation targeting” (E.
Gramlich, Board of Governors of the US Federal
Reserve System, 2000)
• “Originally, inflation targeting is a policy framework to
enhance the transparency regarding the conduct of
monetary policy and to strengthen the credibility of
the commitment to price stability.” (M. Hayami,
Governor of the Bank of Japan, Tokyo, 2000)
Transparency and inflation targeting
• “Inflation targeting is essentially a framework for
enhancing the transparency of the conduct of
monetary policy. But arguments in Japan are
problematic since they regard inflation targeting
as a measure to overcome deflation … ” (M.
Hayami, Governor of the Bank of Japan, 2003)
• “Central banks practice transparency in different
ways.” (S. Gjedrem, Central Bank of Norway,
2005)
• Transparency was gradually delinked from
inflation targeting.
Transparency and standards
• In 2001, V. Reddy, Deputy Governor of the
Reserve Bank of India, anchored transparency
to the introduction and respect of
“standardized codes for market practices, for
example, through dissemination of
information by Reserve Bank of India,
monitoring of market activities and
encouraging standardized accounting norms”.
Transparency and standards
• The debate about the connection between
transparency and standard codes occurred mainly in
the then emerging countries, stimulated by the
necessity to anchor transparency to some sort of rule.
• “But if it is accepted that codes and standards are likely
to reflect different stages of development, then it is
even more important that countries make clear to
which codes and standards they are actually adhering.
That is why countries should not be able to opt out of
‘transparency about transparency’ (M. King, Deputy
Governor of the BoE, 2001)
Transparency and financial markets
• In the mid first decade of 2000s, it became clear
that transparency can be put in relations with the
reaction of financial markets to monetary policy.
In 2004 Bernanke (Fed) stated:
• “If communication and transparency can help
financial markets develop more accurate
expectations of the likely future course of the
funds rate, policy will be more effective … and
risk in financial markets should be reduced as
well”. (2004)
Transparency and financial markets
• The relationship was particularly stressed by ECB.
• “Adequate transparency is a necessary basis for
an efficient functioning of financial markets.
Recent experience has shown how perceived
opaqueness or uncertainty regarding the
underlying exposures, in particular of financial
institutions, has translated into a loss of
confidence with a resulting disruption in the
interbank market.” (J. M. Gonzalez Pramo,
Member of the Executive Board of ECB, 2007)
Transparency and financial markets
• “It will be crucial to ensure adequate
transparency regarding financial markets,
institutions and financial instruments. The
availability of adequate information is the basic
prerequisite for sound investment decisions,
effective risk management and market discipline.
In this way, transparency not only contributes to
a more efficient allocation of capital, but is also
the best insurance against irrational herd
behavior and the propagation of financial
turbulence” (Trichet 2008)
The Level of Transparency
• Are there limits to the central bank’s transparency?
Papademos paraphrasing Einstein said: “Every central bank
has to be as transparent as possible but not more so.”
• Papademos, Liikanen (Governor of the Bank of Finland),
and others stressed the importance of maintaining
communication at a high level of transparency although
uncertainty was growing. Democratic accountability,
transparency and uncertainty became common features of
the central banks’ communication. “Good communication
must also take into account uncertainty”.
• Nevertheless, the ECB does not subscribe to the view that
unlimited transparency is always beneficial. (Papademos
2008)
Transparency and crisis: crisis of
transparency
• Is something changing?
• Does an optimal degree of transparency exist?
• Economic agents may become overloaded
with information.
• By providing more and more information,
paradoxically central banks show how little
they actually know.
Australia
Botswana
Brazil
Bundesbank
Canada
Chile
China
Denmark
ECB
England
Finland
France
Hong_Kong
India
Indonesia
Italy
Japan
Kenya
Korea
Malaysia
Mauritius
Mexico
Netherlands
New_Zealand
Nigeria
Norway
Pakistan
Philippines
Saudi_Arabia
Singapore
South_Africa
Spain
Sweden
Switzerland
Thailand
Turkey
Uganda
United_Arab_Emirates
USFRS
0.0012
0.001
0.0008
0.0006
0.0004
democracy
transparency
0.0002
independence
0