Central Bank Transparency: The Importance Of Transparencytion In Central Banking

Figure 2.2.1: Central bank transparency
Transparency has emerged as another key feature of the central banking. The traditional view has been that it is better to achieve at least some of central banks’ objectives outside the center of attention. In more recent times central banks have discovered transparency as a precondition for accountability and more openness. Together with central bank independence, transparency forms the second pillar of central bank governance. With the fact that central banks have become more independent, the demand for transparency has increased. Independence gives central banks more freedom of choice in their tactics, while transparency is a way of holding them accountable for their decisions. As proposed by Crowe
In turn, Dincer & Eichengreen (2007) combined the best by constructing the Eijffinger and Geraats (2006) index for 100 central banks from 1998 to 2006. First, the authors analyzed the question whether the trend of greater transparency is widespread. They show that the trend is general: a large number of central banks have increased transparency since the late 1990s. Then the authors analyze the determinants and effects of central bank transparency in an empirical framework. As a result they argue that transparency is greater in countries with more stable and developed political systems and deeper and more developed financial
The author provides a new explanation for why central banks became transparent over the last two decades. He argues that “central bank transparency is likely to be influenced not only by domestic economic, political, and institutional variables but also directly by the transparency of other central banks and their characteristics.” This is because the fact that central banks communicate, meet and discuss their policies and operations. In addition, many central banks transfer their knowledge to their peers formally by offering so-called technical assistance though training centers. So it is difficult to identify such peer effects. For this purpose the author applies social interaction panel regression models for the observational data. He uses a global sample of central banks and examines the determinants of CB transparency in two different areas: one covering monetary policy and the other covering financial stability. In contrast to the previous literature on central bank transparency, the results from this paper indicate that domestic factors are not the only driving forces behind the increases in transparency. External factors and peer effects also play an important role. The author concludes that transparency increased also because of a favorable global environment and because of the peer effects among central