In the wake of the 2008  financial crisis, China’s consumer prices skyrocketed. The People’s Bank of China was condemned by the public for  its incompetence in harnessing inflation.

In a modern economic and financial system, central bank transparency determines the efficacy of monetary policies and influences how they are implemented. This explains the emphasis on transparency in central banks of developed countries, such as the US, UK, Japan, Canada, Sweden, New Zealand and Australia. Their measures include issuing policy reports, disclosing decision processes, supplying economic data, delivering public speeches and disseminating press releases.

According to “Key Issues in the Choice of Monetary Framework in a Global Context” authored by Maxwell Fry et. al, nearly three-fourths of the 94 central banks investigated pay close attentionto transparency, recognizing it as a top priority along with independence and inflation management.

Appraisal systems

In the past few decades, monetary policy transparency has been a focal point of economic studies. Numerous studies have shed light on its conceptual framework as well as its logical relationship to policy effects and quantitative dynamics. In 1986, Marvin Goodfriend, an economist at Carnegie Mellon University, argued that central banks should provide up-to-date information in order to stabilize the economy and optimize the effects of monetary policy. Adding to Goodfriend’s original research, many recent studies show that transparency creates economic stability while also raising the credibility of central banks.

Economists developed various systems to appraise the transparency of monetary policies adopted by central banks around the globe. In general, they can be classified into three categories. The first type takes the form of a questionnaire. For example, Fry and his colleagues, after distributing questionnaires to central banks in 94 countries, came up with a “policy explanatory index” to evaluate their policy decisions, prospective analyses, assessment releases and research conclusions. The second type of appraisal systems is forged out of close examinations of government provisions and practical operations of central banks. In How Transparent Are Central Banks?, economists Sylvester Eijffinger and Petra Maria Geraats approached the issue from political, economic, procedural, policymaking and operational perspectives. The third type of appraisal system ranks central bank transparency through observing and analyzing market players’ reactions to bank policies.

Monetary policy transparency is axiomatically important in terms of both theory and practical application. How to gauge it objectively and accurately is still open to discussion.

Mainstream studies on the issue have customarily adopted the appraisal method devised by Eijffinger and Geraats, which appears to be rather subjective in criteria setting, category formation and weight assignment. Moreover, although there are a number of empirical analyses pertaining to the influence of macroeconomic monetary policy transparency, few scholars have ever tried to examine the issue through the lens of microeconomics. Considering the structural defect of extant research, it is advisable to integrate empirical frameworks, such as the one formulated by Eijffinger and Geraats, with mathematical models, such as the new Keynesian dynamic stochastic general equilibrium (DSGE) and Bayesian inference.

Chinese reality

After applying such an integrated approach, economists have affirmed that China’s monetary policy is unflatteringly opaque in all aspects specified in the Eijffinger-Geraats framework, testifying to the conclusion of several domestic studies and cross-national surveys. Such opaqueness reinforces and is reinforced by the subservient relationship of the People’s Bank of China, the country’s central bank, to the government, which breeds inflations and economic bubbles.

China’s central bank is understandably wary about issues of institutional design since its foremost obligation is to sustain rapid economic growth, which is the highest priority on the government agenda. In this light, central bank transparency remains elusive in the Chinese context, given that the government is determined to influence each stage of the entire economic process. Conversely, in countries with highly transparent monetary policy, governments have to abide by market rules simply because they are unable to impose arbitrary policies on economic activities.

Undoubtedly, reasonably independent banks can focus on combatting inflation with poise and efficiency, whereas subservient ones have to oscillate around entangled and conflicting goals, such as sustaining economic growth, bolstering employment and stabilizing commodity prices. Political intervention hinders the latter from reaping the infinite benefits of transparent monetary policies.

Future reform

China has gradually transitioned into a market economy. In this context, the central bank’s opaque monetary policy and tendency toward obedience are evidently inefficient and lead to chaos. To accelerate financial reform, it is necessary to forge a stable, accountable and independent bank system first and then move toward healthy, efficacious monetary policies.

Considering China’s economic status quo in which macroeconomic regulation and control play a central role, the forthcoming financial reform takes three steps. First, the central bank should be more decisive in battling inflation, ensuring relative price stability. Second, the bank should reach out to the public spontaneously, resolving the ambiguity and miscommunication that are the root causes of inefficient policy implementation. Third, the central government must consciously remove unnecessary restrictions on the bank to lend institutional support to the profound reform of monetary policies.

Ma Yong is an associate professor from the School of Finance at the Renmin University of China.

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Though falling short of objectivity, Eijffinger and Geraats’s framework highlighted and defined the key components of monetary policy transparency.

1.Political transparency refers to openness about policy objectives. This comprises a statement of the formal objectives of monetary policy, including an explicit prioritization in case of potentially conflicting goals, and quantitative targets.

2.Economic transparency focuses on the economic information that is used for monetary policy. This includes the economic data the central bank uses, the policy models it employs to construct economic forecasts or evaluate the impact of its decisions, and the internal forecasts the central bank relies on.

3.Procedural transparency is about the way monetary policy decisions are taken. It involves an explicit monetary policy rule or strategy that describes the monetary policy framework, and an account of the actual policy deliberations and how the policy decision was reached, which is achieved by the release of minutes and voting records.

4.Policy transparency means a prompt announcement of policy decisions. In addition, it includes an explanation of the decision and a policy inclination or indication of likely future policy actions.

5.Operational transparency concerns the implementation of the central bank’s policy actions. It involves a discussion of control errors in achieving the operating targets of monetary policy and (unanticipated) macroeconomic disturbances that affect the transmission of monetary policy.

(Quoted from “How Transparent Are Central Banks?” )