Central Banking Technical Assistance to Countries in Transition

The Role and Independence of a Central Bank

Susana Almuina, Ian McCarthy, Gabriel Sensenbrenner, and Justin Zulu
Published Date:
December 1995
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In the past decade and a half, there has been a worldwide transition toward the use of market-based practices in the economy in general and the financial sector in particular. The industrialized market economies have opened up their financial systems and their central banks have abandoned the last remaining administrative and direct means of monetary control. Stimulated by these developments, many developing countries are increasingly liberalizing their financial systems and adopting market-oriented techniques of monetary policy. In a third group of countries, the system of central planning has been abandoned and the principles of a market economy have been embraced. As a consequence, financial sector reform and the introduction and strengthening of indirect instruments of monetary policy are also high on the economic agenda of the membership of the IMF, fueled in part by the globalization of markets.

With strong tendencies toward market-based financial systems on the part of all members of the IMF, the discussion on the role and independence of the central bank has gained renewed interest worldwide.1 This should not come as a surprise. In a market economy, a nation’s currency occupies a key position as it is the counterpart to each and every economic and financial transaction and also functions as a unit of account and store of value. To ensure orderly functioning and development of markets, stability of the value of money must be preserved. Therefore, at any time in a market economy, it is prudent to endow the central bank with the appropriate objective and mission and proper institutional arrangements to enable it to fulfill its role. This paper is designed to contribute to the continuing exchange of views on how best to position the central bank in light of these developments.

Objectives of a Central Bank

Confining the role of the central bank to pursuing one single objective—price stability—is most likely the easiest objective to conceive of, as it can be stipulated in one single article in the law on the central bank. However, defining price stability as the central bank’s main objective does not prevent the central bank from exercising a few other supporting objectives. A major trend worldwide is to include promoting financial markets, fostering an efficient payments system, and maintaining a sound and properly functioning financial system as supporting objectives. There are many circumstances in which some minimal achievement of the supporting objectives may be an important condition for a meaningful monetary policy. Indeed, conditions of limited market development or market liberalization can be a significant constraint for policymakers to resort to price signals in preserving the value of money.

These supporting objectives, as the word implies, are meant to support the achievement of the central bank’s main objective of price stability, which is different from considering the central bank as having multiple objectives. Experience has shown that multiple objectives of equal or similar importance (for example, price stability, growth, external competitiveness, and full employment) can at times lead to policy conflicts in the short run, and, what is more, make it difficult to assess the performance of the central bank in achieving its primary task. It is in this context that both the autonomy of the central bank in carrying out its functions and the accompanying accountability must be recognized. If the central bank is to accept responsibility for price stability, it has to have the operational autonomy and authority within the larger political system to discharge that responsibility.

Central Bank Independence

The notion of institutional independence is not as simple to establish as the objective of the central bank and, in addition, is more controversial in public debate. The principle of central bank independence as such is harder to establish by law or to ensure it by invoking the legal provisions. It is rather the complex outcome of the interaction of a number of cultural and institutional features, practices both de facto as well as de jure, and indeed the central bank’s own actions.

Before discussing the most essential institutional underpinnings and practices for achieving independence, some general principles regarding the notion of independence need to be addressed. First, by its very nature, central bank independence can never be absolute. The central bank is the key monetary institution in each country, which implies that in its actions it has to take into account the goals and actions of other institutions, and vice versa, and has to coordinate and establish working relations with those other institutions. Second, the uniqueness of the political context tends to be reflected in the practical arrangements that govern the relations between the central bank and other key authorities. The extent of the public’s tolerance or intolerance for inflation is important. Finally, while independence needs to be supported by proper institutional arrangements, it is also a status that has to be earned, which implies proven competence, leadership, and a track record. Intangibles such as the personality of the chief executive, the integrity of the central bank, the quality of its advice to the government, and the character of its interaction with the business sector are important building blocks of central bank independence.

The role and interplay of at least four institutional features lead to a better understanding of central bank independence and have implications for the central bank and the other policy design and implementation authorities. The first is the decision-making process in the central bank in matters of monetary policy; the second is its relations with the government and the markets; the third is budgetary independence; and the fourth is central bank accountability, the indispensable other side of the coin. This list is by no means exhaustive but covers the more significant pieces in the jigsaw puzzle.

The Board and Its Composition

The size and composition of the policymaking organ of the central banks can have a direct bearing on the institution’s autonomy and effectiveness where the Board has a direct or ex ante policy role. Experience shows that too large a board may slow down the decision-making process. It is difficult to cite an absolute limit in the abstract, since arrangements vary widely among the membership of the IMF (see the accompanying table). However, 10 to 12 members seem to be a psychological limit for a larger-size economy. For large economies, the regional representation at the board may become important. In Germany, the Bundesbank Council comprises the Presidents of the nine Land central banks (the regional central banks), in addition to the members of the Bundesbank Directorate.2 In the U.S. Federal Reserve System, the 12-member reserve banks have representation on the Federal Open Market Committee—the principal policymaking body—and not on the Board of Governors of the Federal Reserve System.

As to composition, there is a general consensus, born of experience, that the members of the policymaking board should not receive any directives from anyone outside the central bank. Board members are usually appointed by the government with backgrounds from various sectors of the economy, but they do not represent the government nor the sectors nor the regions. In some countries it is common practice that, where government or elected officials are appointed, they have to resign their position in the executive or legislative branch. Alternatively, if there is a provision for a government representative on the board, he may only have an observer or liaison function and exercise no voting rights, as is the case, for instance, in Canada, Chile, Germany, and Japan. In other countries, such as Germany, Jamaica, and Tanzania, the government representative can delay the decision of the board, while in New Zealand the minister would have to go to parliament to reverse such a decision. In still other arrangements, board members are drawn primarily from within the ranks of the central bank, perhaps reflecting an attempt to achieve greater homogeneity, a better base for consensus, and therefore speedier decision making. In other countries still, members of the board are drawn from within the central bank plus two or more government representatives. There can indeed be as many arrangements as there are country experiences and historical precedents (see the accompanying table); the all-important challenge is to strive to achieve an appropriate representation of interests without compromising the effectiveness of the decision-making process and the commitment to price stability.3 The experience of the membership suggests that this challenge is an ongoing process that reflects the countries’ political and economic evolution.

Coordination with Government and Relations with Business Sector

The most important dynamic is the coordination between an autonomous central bank and the government at large. This is an area that is usually not reflected in the central bank law, and where it is the practice, it tends to reflect larger considerations than the provisions themselves. Monetary policy is a main element of economic policy, and therefore central bank actions and the government’s economic policy actions need to be closely coordinated. Good working relations between the partners, on collegial terms, guarantee both autonomy and effectiveness and avert markets and economic agents from receiving conflicting signals about the direction of overall economic policy. It is not merely the relations with the government that are critical, but the fiscal policy stance of the government is equally important. Indeed, there is good as well as bad coordination; the latter is when the government pressures the central bank to go soft on monetary policy because it is running a large fiscal deficit and does not want the consequences to show up in interest rates.

Many authorities have created channels for formal and informal coordination and cooperation on matters of monetary policy and general economic policy. Formal coordination can take the form of the central bank being represented on advisory boards for economic policy or government representatives attending central bank board meetings, with or without voting rights. Informal coordination usually takes the form of the central bank chief executive and the minister of finance meeting once a week or fortnightly to discuss matters of mutual interest. There is also regular contact and discussion among more junior officials of the bank and the ministry.

There is a general consensus that the central bank has to have the means and the competence to provide the government with objective advice that will strengthen the design and implementation of policies and long-term benefits. However, in a rapidly changing world, policies are ultimately judged by the markets and other economic agents; therefore central banks need to establish an important relationship with the business sector as well. In an environment of increased domestic financial market activity and increased global market integration, the role, effectiveness, and independence of a central bank are much diminished if it fails to enjoy the respect of the forces and signals which markets generate. Such credibility is gained largely through the competence displayed by the central bank’s long-term commitment to price stability, but also through its capacity to provide leadership in the payments and settlement system, through its capabilities to ensure a sound banking system, and through its accountability.

Budgetary Independence

Narrowly linked to the notion of political independence is the principle of financial or budgetary independence. Most central banks have substantial financial independence from the government across all of their functions and irrespective of the degree of monetary policy autonomy they enjoy. This is despite the fact that most of them are 100 percent government owned. The key element here is that, whatever the institutional relationship of the central bank to the government, it should not be considered and treated as just another agency of the state. Of course, the actual practice may be different from the arrangements in place. But as a mere government department, a central bank would have difficulty exercising the financial and legal independence that is required for the effective execution of its proper functions: all its operations would have to be authorized by the state and funded under the state budget. Under such an arrangement, the government would be tempted to unduly influence the outcome of the quality of the bank’s monetary and financial analysis of the economy by controlling the purse strings. Hence, the right to substantially determine its own budget, subject perhaps to a government or parliamentary veto (France) or to ex post public scrutiny (United States) is crucial.


One important aspect of independence that often tends to be overlooked is that with responsibility and independence naturally come accountability and transparency in conducting central bank operations. The government, the legislature, and the public at large need to have access to the basic information in order to comprehend what the objective of monetary policy is and how it is pursued and conducted. At a certain stage of political and economic awareness, the need for transparency may not be obvious. The cost of inflation may not be well known or the role of monetary policy in the inflation process may not be well understood. Some countries have set up quantitative targets to underpin expectations and to make it easier to assess the central bank’s performance in achieving the price stability objective. In some countries this takes the form of formal inflation rate targets as the direct and explicit representation of the price stability objective; in others the measurable aspect lies in the maintenance of a fixed exchange rate linked to an anchor currency; and in a few other cases, public targets for various monetary aggregates are still taken seriously to fulfill this role in quantitative performance assignment. But irrespective of whether or how the broad price stability objective is given clearer meaning, there is universal acceptance that achieving and maintaining price stability is a medium- to long-term task. It takes some time for the bulk of the monetary policy impact on inflation to be felt, and many influences, other than monetary policy, have an impact on inflation rates in the shorter term. In many parliamentary democracies, the central bank is first and foremost accountable to parliament, which exercises broad oversight as the highest political authority. In many such cases the chief central bank executive frequently meets with parliamentary organs and explains and justifies the central bank’s policy actions.4 In addition to this channel, central banks also report to the public at large through publications, including a set of reliable financial statistics, and interviews with the press to explain what the object of monetary policy is and how it is conducted.

This is a brief review of the experience and debate of the role and independence of the central bank. There are important dynamics, both institutional, as well as operational, which have an important bearing, and the fact that, not infrequently, practice may vary somewhat from the actual arrangements, adds to the puzzle. Nonetheless, the interplay of seemingly competing as well as complementary forces determine the extent to which the goal of price stability can be pursued, an objective about which there is no major dispute. The political underpinning in which this role is exercised is as varied as there are countries and political systems. But it is also clear that the best results are achieved when the society as a whole recognizes the critical nature of the need for long-term stability of the value of the national currency as an overriding and long-term objective of monetary policy.

Some Issues in the Role and Independence of Central Banks1
CountryRole, Size, and Composition of BoardsGovernment’s Representation in Bank BodiesRole of Bank in Monetary and Exchange PolicyResolution of Conflict Between Bank and GovernmentMonitoring of Bank PerformanceCoordination of Bank and GovernmentLoans and Advances to Government
AustraliaBoard of 11 members. Governor is chairman, and Deputy Governor designated by Governor is deputy chairman. Apart from Governor, Deputy Governors, and Secretary of Treasury, at least 5 members are not officers of the Bank or civil servants. Governor and deputies have terms of 7 years; outside directors, 5 years. Quorum is 6. Decisions by majority vole of members present and voting; Chairman has casting vote. Meetings held as determined by Board or directed by Chairman or Deputy.Secretary of the Treasury is ex officio member of Board. A Deputy Secretary in the Treasury may be nominated by the Secretary to attend a Board meeting; in this case, the Deputy Secretary is deemed member of the Board.Broad powers. Bank is charged to use its powers to best contribute to stability of currency, maintenance of full employment, and economic prosperity and welfare of the people.For issues not resolved by agreements between Treasury and Board, Board provides statement to Treasurer, with the Treasurer making a recommendation to the Governor-General who would then determine the policy to be adopted by the Bank. The Government would assume responsibility for adoption of that policy; copy of relevant statements and determinations to be tabled in Parliament. (These provisions have never been invoked.)Parliament.Law requires the Board from time to time to inform the Government of the Bank’s policy and the Governor and Secretary of the Treasury to keep each other fully informed. Governor briefs Treasurer after each Board meeting.In 1986 agreement between Bank and Treasury to discontinue longstanding provision for the Bank to provide temporary finance by discounting treasury bills. Since 1985, agreement between Bank and Treasury for stand-by overdraft credit at commercial interest rate, and with repayment to be made from proceeds of next weekly treasury bill auction.
AustriaGoverning Board is policy body (14 directors, including Governor, 2 deputies, and 11 other members). Quorum is 7; majority vote. Monthly meetings. Bank is joint-stock company (Stale is 50% shareholder), general meeting of shareholders elects 6 directors and 4 auditors. Governor appointed by President on advice of Government, Government appoints deputies and 5 directors, 6 directors appointed by general meeting, for 5 years renewable. Directors must not be active civil servants. Board of Executive Directors for daily operations.State Commissioner appointed by Finance Minister attends Board meetings. He examines Bank’s business and adherence to law.Comprehensive powers, Bank shall ensure by all means at its disposal price stability and exchange rate stability with respect to stable foreign currencies while paying due regard to Government’s economic policy. No explicit provision on foreign exchange policy.Law includes explicit mechanism of Arbitration Tribunal to resolve conflict concerning the financing of public deficits. Decisions deemed in conflict with legislation maybe temporarily suspended by State Commissioner.Annual report approved by general meeting of shareholders. No reporting to Parliament or other entities.No special provision.At request of Finance Ministry. Bank may discount short-term treasury bills up to 5% of yearly tax revenue.
AzerbaijanBoard of 9 members; all appointed by Parliament on recommendation of President; 4 members are from outside the Bank. Simple majority vote; chairman has casting vote. Not less than one meeting per month.None.Limited role. Annual monetary policy guidelines set by Parliament; exchange policy set by Government.No special provision,Parliament.Frequent meetings.No limits.
BelarusBoard of 12 members selected from the staff and appointed by Parliament. Quorum requires a majority of members; decisions by majority vote; chairman has easting vote. Board meets at least twice a quarter.Not at present, but envisaged in a new draft.In consultation with Ministry of Finance, develops annual credit plan and exchange rate policy Chairman may take independent line in testimony to Parliament.No special provision.Parliament. Parliament reviews and approves annual report.Close coordination with Government.Collateralized loans are possible up to 5% of GDP. with maturities not exceeding 6 months.
CanadaNo governing body; Governor is fully responsible for monetary policy. He is advised by committee of his senior officers. A Board of Directors of 12 members (including Governor and senior Deputy Governor) is only in charge of administration, oversight, and reporting to Governor on economic developments. Law requires that directors represent “diversified occupations”: selected by tradition to represent the provincesDeputy Minister of Finance is ex-offtcio member of Board of Directors, without voting right.By law. Government and Bank must maintain close relationship in determining monetary and exchange policy. Government decides exchange regime, parity, and sets exchange rate policy directives.Minister of Finance has right to override Governor decisions. After consultation with Governor and with agreement of Government, Minister may issue directives on monetary policy to Governor that are valid for a limited period of time. These must be made public and placed before Parliament.Parliament reviews annual report of Governor to Minister of Finance. Members of Bank may appear before parliamentary committees.Regular consultations between Minister and Governor. In practice, they occur about once a week. A few times a year, Minister of Finance and Governor inform Prime Minister of economic situation.Possible at Bank’s discretion. Very rarely used (only twice in past 60 years). Strict limits on terms and amounts.
ChileBoard of 5 members appointed by President of Republic (with approval of the Senate) for 10 years renewable. Governor is chairman of Board for 5 years renewable. Quorum is 3: majority voting; chairman has casting vole. At least one meeting per week.Minister of Finance may attend meetings without right to vote. Minister may suggest adoption of specific decisions which Board must consider at next session Minister may suspend Board decision for not store than two week;, but not if Board is unanimous.Broad powers. Bank sets own policy targets: but in adopt ing its decisions, the Board must take due account of Government’s general economic stance.No special provisionObligation to report to President of Republic and to the Senate Bank is “independent institution of constitutional rank with unlimited duration.”No special provision.Prohibited, except in case of threat of war.
DenmarkPolicy body is Board of Governors (Chairman appointed by Grown. 2 deputies elected by Board of Directors, in practice for life). Board of Directors meets quarterly to decide on administrative matters (25 members for five years of which 8 members of Parliament, one economist, one lawyer, 15 representing the economy). Committee of Directors meets at least monthly on administrative matters (7 members for one year renewable elected from the Board of Directors).Members of governing bodies are not subject to political directives. Minister of Economic Affairs is Royal Bank Commissioner, serves as Chairman of the Board of Directors, and may also attend meetings of Commiltee of Directors. Royal Bank Commissioner and Minister of Finance may participate in Governing Board meetings without voting rights.Broad powers in monetary policy. Board of Governors has full freedom in setting instruments and implementing policy. Exchange rate policy is set by Government in coordination with Bank. Management of exchange rate rests with the Bank.No special provisionRoyal Bank Com-missioner supervises performance of the Bank. Accountability provided through the composition of Board of Directors and Committee of Directors. Bank obliged to publish annual accounts.Regular meetings of Board of Governors and economic affairs ministers in which Prime Minister may also participate. Monthly meetings in central bank of the Prime Minister, Ministers of Finance and of Economic Affairs (and their Permanent Secretaries).No monetary financing of budget.
FranceBoard (“Monetary Policy Council”) of 9 members, including Governor (chair) and 2 Vice-Governors, appointed by Government for 6 years, renewable once. Six other members are of recognized standing in monetary, financial and economic matters, nominated by resolution of Council of Minister for 9 years, nonrenewable: 2 outside directors are replaced every 3 years. Quorum requires two-thirds. At least one meeting per month. General Council in charge of administrative matters and pro-poses appropriation profits.Prime Minister and Minister of Finance may participate in Board meetings and may submit proposals, without voting right. Board members are expressly forbidden to seek or accept instructions from Government or any other person.Bank formulates and implements monetary policy with the aim of ensuring price stability. Government determines exchange rate regime and parity of franc. Bank regulates exchange rate within framework of general exchange rate policy guidelines formulated by Government.No special provision.Annual report prepared by General Council and reviewed by statu-tory auditors; submitted to President and Parliament. Parliamentary committees may hear Governor as needed.No special provision.All types of credit to Government are prohibited.
GermanyBank Council (up to 17 members) sets policy: Bank Directorate (up to 8 members) implements policy. Members of Directorate (including President and Vice-President) are nominated by Government on advice of Council and appointed by Federal President for up to 8 years. Council comprises Directorate and the 9 presidents of Land Central Banks (nominated, by Bundesrat on advice of Council and appointed by Federal President for up to 8 years). Majority vote; chairman has casting vote.Cabinet members may attend meetings of Council without right to vote, may propose motions Bank expressly “is independent of instructions from Federal Cabinet.”Bank has statutory responsibility to determine monetary policy. Obligation to support general economic policy of Government, “without prejudice lo the performance of its functions.” Government decides on exchange regime and sets central exchange rates, in coordination with Bank. Government abstains from setting directives.Cabinet representative on Council may request a decision to be deferred up to two weeks.Bank Council and Directorate have “status of supreme Federal authorities.” Not formally accountable to any authority. Council appoints external auditors whose report, together with comments of Federal Court of Auditors, is communicated to Finance Minister.“Cabinet should invite President of Bank to attend deliberations of important monetary issues.”In Bundesbank Act (1992), short-term advances to Federal and Land Governments and to Federal special funds, collateralized against treasury bills, are subject to absolute limits expressed in deutsche mark. This provision suspended since 1/1/1994 in compliance with Article 104 of Maastricht Treaty.
HungaryBoard comprised of up to 11 members, all members of staff. President and at most 5 Vice-Presidents appointed by President of Republic on proposal of Prime Minister Quorum is 5 members; majority vote; chairman has casting vote. At least one meeting per quarter.Representative of Government invited in advisory capacity.Bank independently formulates and implements monetary policy. Government decides exchange regime, parity and formulates directives within which the Bank conducts intervention.No special provision.Annual report to Parliament.No special provisionYearly increase in outstanding loan to Government not to exceed 3% of planned annual revenue of central budget. Loans are at market interest rate.
IndiaGoverning body is Central Board of Directors (Governor, no more than 4 Vice-Governors, 4 directors from regional boards, one government official, and 10 other directors). Governor and Vice-Governors appointed by Prime Minister for 5 years renewable. Other directors, 4 years renewable. There are 4 regional boards of 5 members appointed by Government (4 years renewable) among regional economic and banking interests.Government official attends Board meetings, without voting right.Management of currency and maintenance of monetary stability. Full employment is also an objective, In practice, monetary and exchange policy reflect high degree of collaboration between Treasury and BankGovernment with unconditional authority over policy and broad power to give general directives to Bank. Government may give directives to Bank, after consultation with Governor, if it is considered necessary to the public interest. Government can declare Board dissolved if it deems Bank failed in its obligations. Bank affairs are then entrusted to agency determined by Government, This action must be put before Parliament.Not less than two auditors appointed by Government report on annual balance sheet and accounts of Bank. Bank sends weekly summary accounts to Government for publication.No special provision.No legal limits on loans but Bank has legal authority to set terms. Repayment not to exceed 3 months. Bank does not pay interest on Government deposits.
JapanBoard of 7 members; Governor, 2 representatives of Government, 4 “appointive members” from outside the Bank appointed by Cabinet with consent of Parliament for 4 years renewable. Chairman of Policy Board elected by Board. Decisions by simple majority vole. Daily management is con-ducted by Governor with assistance of Deputy Governor (both appointed by Cabinet for 5 years renewable) and executive directors.Representatives of Ministry of Finance and of Economic Planning Agency participate in meetings of Policy Board with no voting right.De facto, wide powers to formulate and operate monetary policy. Interest rate decisions are based on independent judgment of the Bank. Foreign exchange policy determined by Government; Bank only acts as agent of Minister of Finance.Ministry of Finance legally has the power to issue directives to the Bank-never used since enactment of Bank Law in 1942.Policy Board is required to submit to Parliament an annual report via Minister of Finance. Bank provides sufficient explanations on its economic policy assessment and policy decisions on Diet’s request.No special provision. Regular meetings held between senior officials in Bank and Ministry.Finance Law (1947) overrides Bank Law (1942) by prohibiting the Government from having the Bank underwrite Government bonds or borrowing from the Bank. An exception is the underwriting of Financing Bills (short-term debt for intra-fiscal year imbalances).
KazakhstanBoard of 9 members, chairman, 2 deputies, 2 bank staff, and 4 external directors from Government and Parliament. Quorum requires two-third majority: decisions by majority vote; chairman has casting vote. At least three meetings per quarter.Representatives of Ministry of Finance, Ministry of Economy, Parliament, and Presidency-Ensure internal and external stability or currency: take part in formulation and implementation of monetary and exchange policy.No special provision. Chairman nominated by Parliament can be removed upon recommendation of President.Accountable to Parliament and President Parliament reviews and approves annual report.No special provision.Temporary credit against collateral. Maximum maturity six months; interest at market rate.
KenyaBoard of 7 members, including Governor, Vice-Governor, Minister of Finance, and 5 other members. Quorum is Governor, Vice-Governor, Minister of Finance, and two members. Decisions by majority vote; chairman has casting vote. At least one meeting every two months.Minister of Finance is member of the Board, can call meetings and has the right to suspend a Board decision.Policy is formulated by GovernmentExecutive branch has final authority on policy, but subject to due process and possible protest by Bank. Government may issue directives to Bank in case of difference of opinions.Minister of Finance.No special provision.Direct advances to Government may not at any time exceed 25% of gross recurrent revenues of Government. Interest rate determined by Board.
LithuaniaBoard of no Jess than 5 members, chairman, vice chairman, deputy Finance Minister, and no less than two other members (not necessarily selected from the bank’s staff). Quorum requires a majority of members; decisions by majority vote; chairman has casting vote. No prescribed frequency of meetings.Deputy Finance Minister is member of the Board.Bank responsible for credit policy and exchange rate policy.No special provision. Chairman appointed by Parliament can be removed upon recommendation of President.Parliament reviews and approves annual report.Chairman participates in cabinet meetings on economic issues.Prohibited.
MexicoBoard of 6 members appointed by Cabinet (Governor for 6 years) and other members for 8 years from outside the Bank. Governor is chairman of Board. Quorum of 4, including Governor; majority vote.Minister of Finance may attend meetings, without right to vote; may convene Board meeting.Bank has broad powers to set monetary policy. Finance Ministry sets exchange policy.No special provision.Bank must send periodic reports to Cabinet and Parliament on policy and developments Parliament may request testimony from Governor.No special provision.Bank may provide uncoil ate ralized advances to Treasury up to 1.5% of planned expenditures. Credits beyond that limit must be repaid by issuance of treasury bills within 15 days.
MoldovaBoard of 9 members, two from Government, and 7 from staff (one appointed by Government). Quorum requires majority of members; decisions by majority vote. At least two meetings per month.One representative from Ministry of Finance and one from Ministry of Foreign Economic Relations,Parliament formulates monetary and exchange policy.No special provision.Parliament.Chairman has consultative role in cabinet meetings.Within limits of monetary policy guidelines set by-Parliament.
NetherlandsGoverning Board responsible for policy decisions (President. Secretary and up to 5 Directors, appointed by Crown for 7 years renewable). Supervisory Board (12 members appointed by Ministry of Finance for 4 years renewable). Bank Council, an advisory body (17 members, chaired by Royal Commissioner, meeting al least 6 times per year, including 6 members from Super visory Board and 12 members appointed by Crown representing finance, industry and labor).Royal Commissioner appointed by Crown supervises Bank and may attend meetings of other two Boards in advisory role.No special provision Bank has high degree of independence in determining monetary policy. Guilder parity is decided by Government upon advice of Bank, whose opinion is later published. Governing Board decides when and how much to intervene in foreign exchange market.Finance Minister, in consultation with Bank Council, can issue directives to Governing Board. If in disagreement, Board can appeal to Crown. If Crown sides with Minister, both opinions are published if Crown deems them consistent with national interest. This provision has never been used and will be abolished under Stage llf of European economic and monetary union (EMU).Governing Board reports to Supervisory Board. President informs Council on policy matters. Supervisory Board supervises management and adopts annual report. Royal Commissioner verifies compliance of financial statements with law. Bank publishes weekly summary balance sheet.Minister of Finance and Bank President meet informally once a week. Minutes are confidential.Advances to Government prohibited under Maastricht Treaty as of 1/1/94. The Bank had an obligation to grant secured and interest-free credit up to f. 150 million. A further limited and collateralized facility was agreed yearly to bridge temporary cash needs.
New ZealandBoard of 7-10 members (including Governor and one/two deputies members of staff). Up to 7 outside Directors appointed by Finance Minister for 5 years based on business/ financial experience-Board has no policy function, only monitors Governor appointed by Minister upon recommendation of directors Quorum must have majority of Directors. At least 10 meetings per year.None. Directors monitor, on behalf of Minister of Finance, performance contract of Governor. Governor must fulfill Bank’s statutory price stability objective (SPSO) as expressed in quantitative inflation target (QIT) laid before Parliament and published.Governor responsible for formulating and operating monetary policy 10 fulfill SPSO and QIT QIT negotiated between Governor and Minister before Governor’s appointment. Minister can give directives on exchange policy and/or fixing exchange rate, but in their absence, exchange policy is fully subsumed in monetary policy.The Government, by publication of a formal statutory directive, can override the Bank’s SPSO for not more than 12 months or seek but not force a renegotiation of the QIT (any change requiring to be published). In case of conflict with SPSO, Governor is not required to implement exchange policy directives of Minister, until overridden by Governor-GeneralAccountability focused on Governor’s performance contract with Minister. Bank must provide annual report on all activities and separate six-monthly reports on monetary policy to Minister and Parliament. Governor is required to appear before Parliament to answer questions.No special provision.No legal limits on advances or loans to Treasury. Statutory inflation target determines implicit limit.
PolandGovernor appointed by Parliament on Prime Minister’s motion. Vice-Governors appointed by Prime Minister on Governor’s recommendation, other members appointed by Governor (number is not specified), Governor has wide powers in defining work of Board.No special provision.Parliament formulates monetary and exchange policy.No special provision.Parliament.Governor participates in sessions of Parliament and Council of MinistersNo special provision. Bank must follow monetary guidelines set by Parliament.
PortugalBoard of up to 8 members appointed by Council of Ministers for 5 years renewable. Governor is Chairman of the Board. Quorum requires majority; majority voting with no abstention; Governor has casting vote. At least one meeting per week. There is a Board of Auditors and an Advisory Board.None.Formulation of monetary and exchange rate policy decided jointly with Government. Bank assists Government in design and implementation of monetary and exchange policy, having due regard for the Government’s economic and financial policy guidelines. Policy measures have to be signed by Minister of Finance.Governor may suspend Board decisions after informing the Government. Decisions of Governor and Board may be appealed to Courts in manner provided by law.Audit Board appointed by Minister of Finance monitors functioning of Bank and compliance with laws and regulations. Governor is invited to appear before Parliamentary Committees.No special provision.Advances cannot exceed 10% of revenue collected in previous year. Bank may also underwrite Treasury notes on terms agreed with Ministry. This provision abolished to comply with Stage II of EMU.
RussiaBoard comprised of Chairman {appointed for 5 years by Parliament), first vice chairman, vice-chairmen, and, on a rotating basis (every 6 months), directors of main departments and chiefs of branches, approved by Parliament (number is not specified). Quorum requires a majority of members; decisions by majority vote; Chairman has casting vote. At least one meeting per month.None.Broad powers in the monetary and exchange area; Bank shall “regulate” the exchange rate of the ruble. Bank credits are mostly allocated by credit policy commission dominated by Government.No special provision. Chairman nominated by Parliament can be removed upon recommendation of President.Bank is supervised by Parliament, submits annual report, and 6-monthly statements on economic and financial outlook.No special provision, except in the context of the credit policy commission.No statutory limit on advances and no prescribed interest rate.
SwitzerlandBank is closed joint-stock company. For policy decisions. Bank Directorate (3 members for 6 year appointed By Federal Council. Governor is primus inter para). For supervision, control, and administration, general meeting of Shareholders, Bank Council (-40 members for 4 years, of which 25 appointed by Federation Council, meeting quarterly), and Bank; Committee (10 members for 4 years appointed by Bank Council, meeting monthly)None.“Bank shall implement a credit and monetary policy serving the general interest of the country.” Although Federal Council has important policy powers in control of capital inflows, these are not used. By tradition, Bank enjoys wide independence in foreign exchange policy.Bank and Cabinet must consult to harmonize important decisions before implementation. Within these limits, cabinet “authorizes measures of significant economic and monetary impact.”Federal Council approves regulations and annual report. Bank reports annually to its shareholders, who do not include Federal Government. General meeting, Bank Council, and Bank Committee have supervisory role.Bank Directorate meets periodically with Government’s delegation for economic affairs.Advances to Government prohibited. Bank “shall participate in the issuance of bonds of the Confederation.”
ThailandGovernor and Deputy Governor appointed upon recommendation of Government. Other members of Court of Directors appointed by Council of Ministers upon recommendation of Minister or Finance.Under-Secretary of Ministry of Finance attends Court of Directors meetings.Government formulates monetary policy. Central Bank decides on interest rates, in consultation with Ministry of Finance.Executive branch with final authority on policy, but subject to possible protest by Central Bank. Under-Secretary of Finance can veto Board decisions, which has a temporary or suspensive effect.General supervision of affairs of Bank of Thailand rests with Minister of Finance. Minister appoints President of Audit Council to examine accounts of Bank.No special provision.Central Bank grants unsecured loans and advances to Government for expenditure authorized in ordinary budget. Loans not to exceed 25% of such expenditure and subject to repayment within first quarter of succeeding fiscal year.
TunisiaBoard of 10 members, appointed by Head of State; Governor for 6 years renewable, General Director, and 8 outside Directors for 3 years renewable (4 Directors chosen for high office in Government agencies or public institutions, 4 chosen for other professional experience). Quorum is 5; majority voting or two-third majority for specific decisions; Governor has casting vote. At least monthly meetings.Four Directors are from Government or public agencies. Auditor appointed by Finance Minister attends Board meetings in advisory capacity.Board decides on interest rate policy. Bank lends support to Government’s economic policies and informs of conditions detrimental to monetary stability. Governor must be consulted by Cabinet on issues concerning credit or monetary affairs.No special provision.Governor reports to Head of State. Auditor appointed by President on proposal of Minister of Finance.No special provision.Advances up to 5% of current Government revenue of previous year, up to 240 days, whether consecutive or not, during calendar year. Terms agreed with Finance Minister.
TurkeyBoard of 7 members, Governor and 6 members elected by General Assembly of shareholders (Treasury is majority shareholder) from outside the Bank for 3 year renewable. Governor is chairman of Board and appointed by Council of Ministers Upon proposal of Board for 5 years renewable. Quorum requires two thirds: majority vote; Chairman has casting vote. At least one meeting per month.No special provision; Treasury is majority shareholder. Four Vice-Governors (non-members of Board) appointed by Council of Ministers for 5 years renewable form executive committee under chairmanship of Governor.Bank sets monetary and exchange policy jointly with Government or within Government’s guidelines.In case of dissent between Governor and Board, Prime Minister serves as arbiter. No special provision on dissent between Board and Government.Bank submits annual report to Prime Minister and General Assembly of shareholders. Audit performed by Committee of Auditors elected by General Assembly.No special provision.Short-term advances to Treasury not to exceed 12% of difference between current fiscal year appropriations and previous year appropriations; to be reduced to 3% by 1998. Interest rate is determined jointly by Bank and Prime Minister.
TurkmenistanBoard of at least 5 members, not necessarily drawn from the staff. At least one meeting per month.None.Broad powers in the monetary and exchange area. The President implements policy.No special provision. Salary of chairman is set by President.Accountable to President.Consultations as appropriate.Prohibited. Advances against collateral not exceeding 6 months and at market rates are not prohibited. Total not to exceed 5% of average fiscal revenue of previous three years. Waivers up to 8% are possible.
UkraineBoard is appointed by Parliament. Chairman appointed on the recommendation of Speaker of Parliament; other Board members appointed by Parliament on recommendation of Chairman. Simple majority voting. All Board members are full time officials of the Bank. At least one meeting per month.Government not officially represented on the Board, but members of the Board can also be members of the Parliament. Deputy Ministers frequently attend meetings of the Board without voting right.Bank proposes monetary and exchange policies but final decision rests with Government and Parliament.Board can overrule Chairman. In conflicts between Bank and Government, Parliament is final arbiter.Bank is subordinate to Parliament. Annual report presented to Parliament. Parliament continually oversees activities and determines distribution of profits.Chairman attends Cabinet meetings (proposed that Chairman be a member of Cabinet). Frequent meetings between Bank, Government, and Parliament. Chairman and other officers often testify before Parliament.Bank prohibited from financing “State budget deficits,” but authorized to make loans and advances to Government and to purchase securities.
United KingdomThe Court of Directors consists of the Governor. Deputy Governor (5-year terms, renewable), and 16 directors up to 4 with executive responsibilities in the Bank (4-year terms renewable), all appointed by Crown on advice of Prime Minister. Directors are chosen to reflect a variety of financial, industrial, and commercial sectors. An executive committee chaired by the Governor is responsible for day-to-day management.Government representatives explicitly ruled out.Treasury determines monetary policy and Bank implements with limited discretion on timing of interest rate changes once these have been decided by Chancellor of Exchequer. In practice, extensive consultation between Treasury and Bank on all aspects of monetary policy. Targets set and announced by Government, Bank publishes quarterly Inflation Report, independently assessing prospects for inflation. Bank only acts as agent of Treasury for foreign exchange activities.Treasury has power to issue formal directives to the Bank, but has never done so.Annual report is main instrument of accountability and presented to Parliament through the Chancellor of Exchequer. Others include appearances by Governor and executive directors before select parliamentary committees, speeches, and the Bank’s quarterly bulletins and inflation reports.Chancellor of Exchequer and Governor meet regularly once a month and otherwise whenever necessary. Minutes of the meetings are published.Loans and advances to the public sector are prohibited by article 104 of Maastricht Treaty, which has been incorporated into U.K. law. The Government is however permitted to maintain its “ways and means advances” facility with the Bank (to bridge overnight imbalances) if and so long as the United Kingdom does not move to Stage III of EMU.
United StatesBoard of Governors of 7 members appointed by Senate on nomination of President for 14 years, nonrenewable; not more than one per district, with “due regard” to geographical and professional balance. Chairman and Vice-Chairman have 4-year terms, renewable. Board controls and regulates 12 regional reserve banks; decides on discount operations and reserve requirement. Federal Open Market Committee (FOMC) is principal policymaking body, decides open-market operations; comprises Board of Governors, head of Reserve Bank of New York and 4 rotating heads of regional reserve banks, elected every year.None.Fed is explicitly independent of Executive in determining and implementing monetary policy. In practice. Fed is in contact with all policy-making bodies of Government. Treasury has main powers in exchange rate policy; interventions are decided by mutual consent, even though Treasury has direct responsibility.Federal Reserve System’s position based on delegation of power from Congress. In general, Congress refrains from instructing the Fed.Must report twice a year lo Congress. While required to discuss monetary aggregates. Fed is not bound by its statements on future growth of aggregates. Chairman and Board members frequently testify before congressional committees.Weekly meetings between the Chairman and Secretary of Treasury. Other officials have weekly meetings. Chairman meets with U.S. President periodically.Advances to Government prohibited. Treasury does not borrow directly from Fed. However, extent to which debt becomes monetized depends on extent of Fed’s open market operations.
VenezuelaPresident and 7 Directors of the Board are appointed by the President of the Republic.Four Directors on Board are chosen from various Ministries’ officials.Limited powers. Bank serves in advisory capacity in formulation of monetary policy.No special provision.Submits regular reports to National Executive on domestic and external monetary and financial conditions. All balance sheets of Bank are published in official gazette in large-circulation newspaper.No special provision.Bank may grant loans to Government to cover temporary cash shortages. Limits and terms of lending subject to negotiation between Government and Bank.

Some members of the IMF rely on monetary arrangements that do not entail all functions of a full-fledged central bank, and therefore, in their context, central bank independence has less meaning. Examples of such monetary arrangements include Singapore, Panama, Liberia, Estonia, and San Marino. These arrangements are of different types, depending on the objectives and the economic structures of the country concerned. Nonetheless, they are designed to achieve currency stability, given the prevailing economic and financial conditions. The national banks of the members of the CFA franc zone and of the members of the Eastern Caribbean Currency Area also are not full-fledged central banks in the sense that they are local branches of supranational banks.

There are 16 Länder in unified Germany. However, the number of Land central banks has been reduced from 11 before unification to 9 after unification in order to contain the impact of regional representation on the Council’s composition. Increased centralization was also a key feature of the Bundesbank Act of 1957 compared with the structure established by the Allied military powers in west Germany in 1948.

Over the past few years, some 50 members of the IMF have been revising their central bank legislation, in many cases with the assistance of the IMF’s Monetary and Exchange Affairs Department and the Legal Department. The members of the European Union, in line with the requirement of the Maastricht Treaty, are in the midst of giving their hitherto de facto independent central banks de jure independence. As a result, information on the role and independence of central banks is often in a state of flux and the accompanying table does not necessarily present up-to-date legislation. Rather, its aim is to provide an opportunity to share experiences of the membership on the general thrust of arrangements in this area.

In the real world, parliaments do not play identical roles in all countries. In some countries, parliaments are the legislative branch of the political authorities, whereas in others, they also assume some executive powers. This is true of one-party political systems and military governments of different types. Thus, in the latter cases, a central bank accountable to parliament becomes an instrument of the executive branch, which would tend to impinge on its policy independence. It might therefore, in the interest of central bank autonomy, be better to be accountable directly to the public at large, assuming that the existing political reality would be supportive of such a practice. This would provide the possibility to pursue the objective of long-term price stability.

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