This section summarizes how central banks have organized themselves following the introduction of inflation targeting. Successful inflation targeting requires that central banks undertake extensive analysis and forecasting, operate transparently, and be accountable for their actions. Partly, in response, central banks have improved their internal decision making, introduced a broader range of perspectives into the decision-making process, and reallocated resources. However, most of these changes have also been introduced by non-inflation targeting central banks. Thus, the changes are also motivated by broader trends in central bank management.
Internal Decision Making
Important changes in the internal decision-making processes of central banks have followed the adoption of inflation targeting. Thiessen (1998) argues that this improvement can be largely attributed to the focus on a clear objective—achievement of the mandated inflation targets—and the consequent need to develop a robust framework that maximizes the likelihood of realizing that objective in light of the long lags between monetary policy and their effects on inflation. In particular, the need to explain and justify target breaches is thought to result in a better focused debate within the central bank on the appropriate policy actions to take, and to reduce the likelihood that such decisions will be postponed.
The centrality of inflation forecasts in the operation of policy represents a major challenge for emerging market central banks that target inflation. Emerging market central banks have shifted from controls and regulations to focus more on policy formulation. Moreover, while many emerging market central banks may already have experience in model building, their staff may lack “hands-on” experience in forward-looking models of inflation and in assessing judgmentally the outlook for inflation and the appropriate monetary policy response in an inflation targeting framework.
Developing judgment can be fostered by involving people with a diversity of backgrounds in the decision-making process. While not a prerequisite for inflation targeting, in a number of countries the governance structures of inflation targeting central banks have been redesigned to allow for the direct participation of non-career central bankers in the monetary policy decision-making process on either a full or part-time capacity (Table 6.1). Although this trend is not necessarily linked directly to the adoption of inflation targets—other central banks like the Bank of Japan, the European Central Bank, and the U.S. Federal Reserve also operate with a committee structure—it does help to ensure that a broader range of perspectives is taken into account in the decision-making process. For many of these central banks—such as those in Poland, South Africa, and the United Kingdom—this represents a major departure from past practice, where the views of the central bank on monetary policy issues had traditionally been set mainly by an individual (for instance, the governor of the central bank after consulting with senior staff).
Monetary Policy Decision-Making Body
Monetary Policy Decision-Making Body
| Policy Board or Committee | Australia, Brazil, Canada, Chile, Czech Republic, Poland, South Africa, Sweden, United Kingdom | |
| Governor in consultation with senior staff | Israel, New Zealand | |
Monetary Policy Decision-Making Body
| Policy Board or Committee | Australia, Brazil, Canada, Chile, Czech Republic, Poland, South Africa, Sweden, United Kingdom | |
| Governor in consultation with senior staff | Israel, New Zealand | |
Central banks in most emerging market countries have brought in non-career central bankers at the executive level. With the exception of Brazil and South Africa (which has only just announced its intention to adopt an inflation targeting framework), banks in emerging market countries that engage in group decision-making have opted to employ non-career central bankers on a full-time basis and give them executive responsibilities for supervising functions within the central bank (Table 6.2). This stands in marked contrast to the United Kingdom, where the non-career central bankers on the Monetary Policy Committee are involved only in monetary policy decisions and do not have corporate leadership responsibilities. Thus, while it is not an essential requirement for inflation targeting, the employment of non-career central bankers on a full-time basis might be a useful way for a central bank to make full use of the leadership talents available to it.
Role of Non-Central Bank Members
Role of Non-Central Bank Members
| Full-time with executive responsibilities | Chile, Czech Republic, Poland, Sweden | |
| Part-time without executive responsibilities | Australia, South Africa, United Kingdom | |
| None | Brazil, Canada, Israel, New Zealand | |
Role of Non-Central Bank Members
| Full-time with executive responsibilities | Chile, Czech Republic, Poland, Sweden | |
| Part-time without executive responsibilities | Australia, South Africa, United Kingdom | |
| None | Brazil, Canada, Israel, New Zealand | |
The building of new relationships with officials from key economic sectors may also enhance the conduct of monetary policy under inflation targeting. Many central banks—not just inflation targeting ones—have sought to forge relationships with officials from a wide range of institutions, including companies, industry associations, labor unions, and universities. In addition to helping promote a better understanding of monetary policy objectives and the rationale underpinning monetary policy stances, such contacts can be used to supplement the advice provided by economic models with real-time qualitative information on domestic economic-conditions.
Monetary Policy Committees
Formal monetary policy committees in central banks typically vote to approve monetary policy decisions. Most central banks that use a committee structure have adopted a formal voting process because the committee is formally recognized in the governance structure of the central bank and the members typically are not subordinate to the committee chair, which is typically the governor (Tables 6.3 and 6.4). At the Bank of Canada, in contrast, the emphasis on consensus for decisions reflects a desire to foster a collegial environment among the committee members, all of whom are full-time officials that report directly to the Governor.
Votes versus Consensus Decisions
Votes versus Consensus Decisions
| Single decision maker | New Zealand | |
| Consensus | Australia, Canada, Israel | |
| Votes | Brazil, Chile, Czech Republic, Poland, South Africa, Sweden, United Kingdom | |
Votes versus Consensus Decisions
| Single decision maker | New Zealand | |
| Consensus | Australia, Canada, Israel | |
| Votes | Brazil, Chile, Czech Republic, Poland, South Africa, Sweden, United Kingdom | |
Frequency of Monetary Policy Meetings
Formal reviews eight times a year plus weekly briefings.
In most cases, the voting records are not published, however. With the exception of Brazil, the Czech Republic, Poland, the United Kingdom, and to a lesser extent Sweden (where a member of the committee has dissented publicly from the consensus on occasion), inflation targeting central banks typically release press statements that reflect a consensus of views, or a range of views without attribution. This approach has been defended on the grounds that nondisclosure promotes freer and more frank discussion of the issues surrounding a monetary policy decision. United Kingdom officials, in contrast, believe that publishing voting records fosters a more transparent policy process and helps to encourage greater independent thinking among the members of the Monetary Policy Committee, since they know they will be held accountable by the public for their votes (Allen, 1999).
There has also been a move toward less discretion in the timing of prospective monetary actions. With the exception of Australia and Canada, the timing of monetary actions was regularized after the adoption of inflation targeting to enhance transparency (Table 6.5). This is partly because the focus is typically on medium-term inflation outlooks in an inflation target framework, and less on day-to-day developments in financial markets.19
Timing of Policy Actions
Timing of Policy Actions
| Discretionary | Australia, Canada |
| Linked to policy meeting schedule | Brazil, Chile, Czech Republic, Israel, New Zealand, Poland, South Africa, Sweden, United Kingdom |
Timing of Policy Actions
| Discretionary | Australia, Canada |
| Linked to policy meeting schedule | Brazil, Chile, Czech Republic, Israel, New Zealand, Poland, South Africa, Sweden, United Kingdom |
Internal Resource Requirements
The move toward inflation targeting has often been accompanied by major reforms to organizational structure and an emphasis on increased delegation of authority. Although not directly related to the introduction of inflation targeting, there has been a major cultural evolution in the Central Bank of Chile from an environment that emphasized explicit controls and regulatory oversight of the financial system to one that focuses on banking supervision and policy formulation.20 This factor, combined with major advances in technology and management theory, led the central bank to adopt a more flexible organizational structure, which is less hierarchical and emphasizes decentralization of decision-making authority. Similarly, the Bank of Israel notes that the move away from a monetary policy framework that focused on direct credit, state loans, and foreign exchange controls led it to undergo a major restructuring in the mid-1980s.21
The adoption of inflation targeting by emerging market countries was often accompanied by a major shift in the focus of central bank economic analysis and staffing requirements. The introduction of inflation targeting does not appear to have had major implications for central bank resource requirements in industrial countries, since many of these central banks were already well endowed with analytic resources dedicated to advancing the banks’ understanding of their economies and monetary transmission mechanisms. In contrast, some central banks in emerging market countries have had to enhance their analytic capacities and reorient their economic analysis and data management activities toward gathering the data, building the models needed to generate regular inflation forecasts, and identifying the main central channels from short-term interest rates to inflation. For example, the Reserve Bank of South Africa is actively looking to recruit and train new staff that could help it improve its economic monitoring and model building abilities so that it can develop a framework for forecasting inflation and determining the appropriate policy response. In Brazil’s case, the adoption of inflation targeting was accompanied by a decision to attract staff with strong skills in economics and modeling techniques and helped to focus the economic analysis and research activities in the central bank. These activities are now dedicated to building the models needed to forecast inflation and improve the central bank’s understanding of the monetary transmission mechanism (Leone, 1999). Similar needs have also been identified for emerging market countries that are thinking of adopting inflation targeting in the future.
Inflation targeting also seems to have changed the role played by staff involved in monitoring financial markets. Prior to the adoption of inflation targeting, staff involved in financial market activities, particularly in central banks with fixed exchange rate regimes, played an active role in monitoring markets on a continuous basis, and executing transactions to ensure that interest rate and exchange rate objectives were achieved. With the advent of inflation targeting, there appears to have been a shift in role for such staff. In inflation targeting, the focus of monetary policy is squarely on the medium term rather than on day-to-day developments in financial markets. As a result, those engaged in monitoring markets now spend more time extracting information on the market’s expectations for future inflation and monetary policy stances, and correspondingly less time on monitoring the continuous flow of transactions through the markets.