Transparency in Central Banks – A Norway perspective

Jan F. Qvigstad, Deputy Governor of Norgesbank (Norway’s Central Bank) has a very interesting speech (pdf here) on Central Bank Transparency. It is full of interesting tales that related to transparency.

 He begins saying transparency was unheard of 10 years ago.

Norges Bank’s Executive Board has decided that the key policy rate  now should be 1.5 per cent. If economic developments are broadly in line with projections, the appropriate key policy rate will be 2.75 per cent around the end of next year.

If I had made this statement ten years ago, it would have constituted a breach of confidentiality [1].  Norges Bank considered this to be highly sensitive information. Had I been deputy chairman of the US Federal Reserve Board twenty years ago, I would not even have been entitled to reveal the latest interest rate decision [2].  Today, this sounds rather odd. Transparency is now taken for granted among central banks and in other areas of society.

In London in 1780, the Bank of England was put to a test. In Parliament, Lord Gorden attempted to stop a bill to restore civil rights to Catholics [3].  He drew support from large numbers. Rioting led to the destruction of several public buildings. When an attack was launched against the Bank of England, the building was secured like a fortress and withstood the onslaught, hence the phrase “as safe as the Bank of England”. Through the years, the phrase has been simplified into “as safe as the bank”. As banks and central banks store gold and money in their vaults, their edifices have always been solid, protected by thick walls. In a figurative sense, it might be said that a safe and credible national monetary value relied for a long time on thick central bank walls insulating its internal workings from the general public.

Until our time, central banks have been closed, both physically and figuratively. Central banks were shrouded in an aura of mystique, which they probably had a hand in perpetuating. Central bank governors worldwide refrained from saying too much, and what they did say often sounded cryptic.

He then adds much was same with economic policy:

The economic crisis in the 1930s shattered confidence in free market forces. Markets had to be controlled. The British economist John Maynard Keynes was working on ways of regulating and improving markets. Prominent Norwegian economists, with Ragnar Frisch at the fore, went even further. They advocated that the market economy must be replaced by a planned economy. Ambitions were high. One could almost say that transparency, in carefully selected portions, was a tactical tool.[7]  It reached a head in 1973 when a commission led by Hermod Skånland proposed the establishment of an incomes-policy council that was to decide the limits for wage growth in Norway.

Hmmm… Frisch was the first Nobel Prize winner in 1969. Amartya Sen had similar ideas as well. The issue of Govt vs Markets is an evergreen point of debate.

However public wanted more transparency as democracy means  transparency. It is a best weapon for a democracy. He also points to this very interesting tale:

In 1975, David R. Merrill, a law student, instigated legal proceedings against the Federal Open Market Committee (FOMC) in the US, charging that the FOMC violated the Freedom of Information Act by deferring public disclosure of its interest rate decision by 90 days. The case was eventually heard by the Supreme Court. The Supreme Court ruled that the Federal Reserve could continue its practice if it could provide an adequate explanation showing that immediate disclosure would significantly harm the Government’s monetary functions or commercial interests. The Supreme Court left the assessment of this explanation to the district court. The district court concluded that it lacked the expertise necessary to substitute its judgment for that of the FOMC and the Federal Reserve did not begin to release its monetary policy decisions on the same day until 1994.

🙂 The same transparency issue is haunting Fed. People are not happy with Fed and the way it has supported financial firms. I am not aware if anyone has filed a case against Fed here but senators are after Fed bigtime. Some History lessons for Fed here.

He then reviews how Norway Central bank has gone about Transparency.

He points in the modern economy, transparency plays a critical role as much is based on expectations. However, one should be wary of becoming too transparent as it has costs as well.

Should we publish voting records and the minutes of the Executive Board’s deliberations? Central banks have chosen different solutions. In Sweden, the central bank publishes the voting records and provides an extensive report with the views of members by name. The Bank of England publishes a similar report of the minutes, but members remain anonymous. Norges Bank does not publish a report of the minutes of the Executive Board’s deliberations, but instead publishes a detailed account explaining the Executive Board’s background for the interest rate decision. The interest rate decision is based on a strategy that is described in the Monetary Policy Report. The Report also presents the analyses underlying the strategy. The basis for interest rate decisions is thus available to the general public.

There is no formula for deciding which system is best. Each system has its strengths and weaknesses. Detailed meeting minutes ensure accountability among committee members. This may give rise to good incentives. On the other hand, such transparency may inhibit the actual discussion. Members may come to meetings with pre-drafted statements, impairing a constructive exchange of views. 

Read the whole thing….excellent from the word go.


One Response to “Transparency in Central Banks – A Norway perspective”

  1. Transparency in Central Banks – A Norway perspective « Mostly … | Today Headlines Says:

    […] Lord Gorden attempted to stop a bill to … Read more from the original source:  Transparency in Central Banks – A Norway perspective « Mostly … Share […]

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