Working Paper No. 49
By Clive B Briault, Andrew G Haldane and Mervyn A King
Why have many central banks become more accountable and transparent in recent years? Part of the answer may be found in alternative solutions to the inflation bias problem endemic in discretionary policy-making. For example, accountability can reduce the "democratic deficit" of central banks which have been granted goal and/or instrument independence.
But this is not the whole story. The paper considers a set of distinct models of monetary policy institutions, each of which implies different mappings between
accountability and independence. For example, we consider non-contingent rules; Rogoff's "conservative" central banker; and Walsh's optimal performance contract. Each of these models has real-world analogues.
The paper then considers how accountability and transparency can solve an inflation bias problem of its own in a world characterised by uncertainty regarding the authorities' inflation preferences. Such a model has parallels with the current monetary policy framework in the United Kingdom.
The paper also constructs a quantitative cross-country index of central bank accountability. This indicates that accountability and transparency may have served as a partial substitute for central bank independence among some countries, and as a partial substitute for poor monetary policy credibility among others.