The credibility of the somali central ba

Abstract

The very purpose of this study is to review the credibility of the Somali central bank: its independence, transparency, and accountability. The reason why, this study was conducted is that there was no previous study in its kind regarding the credibility of the central bank of Somalia by looking at its independence, transparency and accountability. The irst objective of this study is to ind out if central bank of Somalia is credible in terms of political, inancial, and monetary policy independence. The second objective is to examine the types and degree of transparency and to settle ways to measure the transparency of the Somali central bank. The third objective is to ind out if there are clear and well deined inancial accountability structures in the central bank (CB) of Somalia. In this study, central bank independence (CBI), transparency, and accountability was measured to ind out whether these elements can inluence or possibly could have some positive effects on central bank credibility. The questionnaire used in this research is a self-administered dichotomous scale. Data was analyzed by using Statistical package for social sciences (SPSS) in descriptive statistics. The target population of this study was 32 respondents from the banking industry in Mogadishu. The result of this study became 55.78 mean averages with a Std. Dev. 5.235. The overall mean averages for a total of 30 questions became 1.859 and overall Std. Dev. 0.1745 which meant the result showed greater abnormality and data distribution positively skewed to the right. The central bank of Somalia has no independence.

Keywords : Independence; Monetary policy; Credibility; Political over the world, there are many countries that have implemented some independence; Financial independence; Central bank; Transparency;

institutional reforms which gave their CBs more independence from the Accountability

political process [2,3]. Some work has been done on time inconsistency on monetary policy, together with Rogof [4] who suggested that the

Introduction

theoretical rationale for these central banks reforms is under the idea In recent years, central banks have substantially changed their

that credibility of the inlation policy depends on central bank with speciic characteristics and attributes and number of countries

more inlation adverse preferences. Around the world policy makers, that has developed such banks has increased. At the end of the 19 th academics and observers has reached a consensus that the goals of

century, there were only 18 such banks that changed their operating monetary policy should be established by the political authorities structures, while by the beginning of the 21 st century the number has but the implementation of the monetary policy with its goals should

increased to 173. Apparently, the irst central banks were owned by

be free from political control and interventions from politicians. the governments but fortunately some governments continuously

he achievability of both stable prices and maximum sustainable incorporated and lastly developed functions that gave those banks the

employment depend the consistency of the economic growth rate and possibility made them the bank of the banks of the 20 th century. hese

the expansion of its productive capacity. Achieving monetary policy central banks have made their historic role for they were assigned

working with substantial time lags requires monetary policy makers changes during the 1990s as they were gradually become independent

taking a longer term perspective when making their decisions-only an from their governments’ control. Due to transformations 34 central

independent CB with a mandate to achieve the best possible economic banks adopted new statues. he structural changes of central banks

outcomes in the longer term is best able to take such perspective. When happened because of two main reasons: in the irst place, over the past

CB policy makers are subject to short term political inluence to achieve decade 34 industrial and developing countries enacted legislations that

short term economic output and employment gains only favoring and allowed the increase of their central banks’ operational independence.

helpful in political election campaigns-such political interference in Also, independence in making decisions on monetary policy has been

monetary policy generates and leaves behind an inlationary pressure increased. his trend has been caused by three main factors: (1) the

that deteriorates economy’s longer term prospects [5]. he institutional institutionalization of the European Central Bank (ECB) in 1999. (2)

device associated with lower inlation is the central bank independence;

he stabilization programs of some emerging market countries. (3)

he economic shit of former communist countries attempted to build market economies. In the second place, reforms have been made to

increase transparency of monetary policy and accountabilities of *Corresponding author: Irbad HM, Lincoln University College, Mogadishu Centre,

Malaysia, Tel: ++252 61 5840544; E-mail: Cirbad10@yahoo.com

central banks. As a formal principle, these reforms relected an attempt to incorporate price stability into monetary policy. hese two main Received February 23, 2016; Accepted February 29, 2016; Published March 07,

reasons: enactment legislations allowing central banks’ independence and reforms increasing transparency of monetary policy and Citation: Irbad HM (2016) The Credibility of the Somali Central Bank: Independence,

Transparency, and Accountability. J Account Mark 5: 157. doi: 10.4172/2168-

accountabilities of central banks are supposed to make it easier for the

public and elected representatives to monitor their central banks [1].

Copyright: © 2016 Irbad HM. This is an open-access article distributed under the

Over the past 20 years, separation between central bank terms of the Creative Commons Attribution License, which permits unrestricted independence and political process has been a great objective. All use, distribution, and reproduction in any medium, provided the original author and

source are credited.

independence also brings time consistent monetary policy. Central bank transparency (CBT) is absolutely crucial for it makes central bankers accountable and more credible in the eyes of the public. Transparency brings greater advantages such as reputability and lexibility on the credibility of the central banks. Transparency also attracts the private sector to infer central bank’s monetary policy decisions [6].

According to Siklos, Spinesi and Williams [7-9] the independence of the Central Bank from the government is an autonomy arrangement which is beneicial to the society but the CB cannot be completely independent from the government. Other authors such as, Gabillon and Martimort [10] Yang [11] and Mixon and Upadhyaya [12] believe that the proponents and opponents of central bank autonomy cannot agree on why such arrangement is so beneicial to society. Forder [13] Suggests convenience policy on the central bank’s autonomy when some governments are convenient to the CBI policy; while Cukierman

A [14] and Eijinger and de Haan [15] view that the CBI can reduce inlation. Siklos, Bohl, and Wohar Implied the inancial stability system, its measurement and its implications with a monetary policy strategy aiming low and stable inlation and to look for prospects of price level targeting must be given special focus. Croitoru [16] debates that there is a possibility for the central bank to act against the increase of efusive asset prices, since they can result severe inancial crises and possibly throwing the economy into liquidity trap. So the central bank must prefer moderate and stable inlation to lower and stable inlation.

In the case of Somalia, the central bank independence (CBI) is under question – without independence there can be no transparency and accountability either. Somalia hasn’t had access to international inancial markets since late 1980s. Only the CB can enable Somalia to take the necessary measures to access international inancial markets by settling arrears with creditors and to build track record of public inancial management in the long term to warrant debt relief. CB is responsible to help Somalia by ensuring the following major tasks: (1) developing monetary and exchange rate policies and money supply regulations, (2) advising macroeconomic issues to government and to monitor economic indicators regularly, (3) to be the inancial agent in the issuance of debt, (4) giving licenses to commercial banking services and other banks and to give legal protection for their operations, (5) drating new central bank Act, (6) drating new Commercial Banking Law, (7) setting sound payment systems. he absence of the above mentioned seven major tasks proves the functionality of the Somali central bank (SCB) is below the bottom line of the graph. Without

a fully functional CB of Somalia, the Somali business context faced

a huge risk and the private sector of the Somali business could not continue to generate positive multiplier efects. So there is a need to

rebuild a credible CB of Somalia under the following three directions: independence, transparency, and accountability.

Credibility is deined by Oxford Advanced Learner’s Dictionary [17] as “the quality that somebody or something has that makes people believe or trust them.” central bank credibility (CBC) is the legitimacy of the CB, central bank independence (CBI) supported by the public, Competence Monetary Policy, Keeping the Unemployment Rate to a Minimum Level, Promising the Expectations of the Private Sector in Price Stability, the Appreciation of the Private Sector to the Objectives of the Policy Makers, the Efectiveness of the CB itself, and Keeping the Inlation Low [18]. “he central bank is credible if people believe it will do what it says” [19]. he researcher believes (FORDER) is measuring credibility while (Blinder) is deining it.

he deinition of this study was derived from Blinder [19] that deines central bank credibility (CBC) as people believe the central bank will do what it says. So the gab is the Somali Central Bank (SCB) needs credibility through independence, transparency, and accountability (Figure 1).

Generally, central bank independence must be beyond the political agenda, accountability should be upon society; transparency is to

be fulilled its task in a more eicient and complex communication mechanism [20].

Independence is the most important element because transparency, accountability, and the communication channels become crucial only ater granting independence to the central banks [21]. “Independent central banks, as a result, ind it easier to keep inlation under control because their societies more willingly accept the sacriices that come along with a tight monetary policy” [22]. he irst attempt to evaluate central bank independence, the index was based on two pillars: political independence and inancial independence measured only in 12 industrial countries which covered nine variables: inal authority, the presence of the government representative in the central bank board, the degree in which the government appoints the board members, board members’ number, board members’ tenure, central bank governor’s tenure, inancial and iscal independence, the authority which stipulates the check and balances of the board members, and the authority which determines the proit distribution Bade and Parkin [23]. In the second attempt Grilli et al. [24] developed an evaluation of central bank independence based on two pillars: economic independence and political independence measured in 18 developed countries that covered ive variables: budgetary deicit monetary inancing; monetary policy instruments; governor’s and board members’ appointments;

Central Bank Credibility

Figure 1: Central bank credibility (CBC).

the relationship between central bank and the government; and the

he CB should have both instrument independence and full inancial fundamental law.

independence to achieve its main objectives. In order to avoid any

he irst attempt in measuring central bank transparency an index conlicts of interest, the high ranking oicials in the CB must have which ofered 11 variables regarding the supply of information, the

to stay long term in oice; also they should not have other positions in government or in the private sector. Developed countries showed

understanding of the monetary policy process, procedural transparency better proxies in actual independence relative to CB legal independence and central bank autonomy and responsibility was established [25]. than developing countries. In developing countries, their behavioral Eijinger et al. [26] has distinguished ive types of transparency:

political, economic, procedural, policy and operational. Eijinger and independence showed two indices which are extremely and relatively Geraats used a normalization technique the minimum score being 0

more important: (1) actual VS legally mandated CB governors’ turnover, (2) the CBs of developing countries are extremely vulnerable

and the maximum score 1. to a very high frequency of political change meaning there are high

he irst attempt to evaluate the degree of central bank occurrences of political transitions within a short period of time leading accountability an index upon 21 developed countries which had a

to replacement of the CB governor [28]. Primarily, CBI can solve three simple four variables was made concerning: the external monitoring

inter-related problems: (1) CBI conigures rationale balance between of the central bank, publishing the meetings of the monetary policy

iscal authority relatively to monetary authority not to satisfy the council, publishing central Bank information in regular publications

government’s long-run budget constraints meaning both authorities; and the existence of an overridden mechanism in case of certain shocks

iscal and monetary are separately independent. his separation of [27].

powers removes the possibility of inlation correspondence to the wishes of the monetary authority. (2) CBI protects citizens from

When the central bank of Somalia was reopened in 2006 until the transitional problems like tax distortions caused by bad political present time in 2015, its functionality is limited. he CB is operating business. (3) CBI solves inconsistency problem of the monetary policy under an old, in the mid of the 20 th century decree Law N0 6 of 18 [29]. In developing countries, the TOR of Cukierman et al. [30] is October 1968. Vision of the CB of Somalia is to: foster monetary signiicantly related to inlation [31]. here is a theoretical standard stability, maintain the value of the Somali shilling, promote the case for CBI intentionally keeping inlation bias because this bias is the economic growth of the republic, and contribute to the inancial

consequence of the interactions between policy makers and rational and economic policies. he reality is that the CB of Somalia cannot

public; this happens when the monetary policy makers is to care about reach global inancial markets because the bank has no functional both price stability and employment but their level of employment regulator to attract private sector investors. he CB of Somalia lacks preference is higher than the natural level Kydland et al. [2] and Barro the following: legal and regulatory framework, strong property rights

et al. [32]. According to Barro et al. [33], and Cukierman [34] the reason culture, enforceability of collateral contracts, and accessible credit

why this CBI inlationary bias is allowed to happen is the existence of information and sound inancial structure. here are two other central

two things: (1) tax distortions (2) employee unions, trying to keep the banks (the CBs of Somali land and Punt land) though they are not real wage above its market clearing level. Apparently, discrete policy in a position to perform key central functions of typical instruments

makers create inlationary surprises trying to push employment necessary to conduct monetary policy yet they are challenge to the CB

above its natural level. he public understands and neutralizes any of Somalia. Because of the limited functionality of CB of Somalia, the

efect of inlation on employment because individuals acquainted Somali remittances companies are the main actors of the Somalia’s

the tricky temptations of the policy makers and correctly forecasts inancial sector. hese remittances companies have large network of

inlation. Undoubtedly, employment remains at its natural level but agents that give service all towns in the country.

monetary policy is subject to a suboptimal inlationary bias. hen, the Without a fully functional CB of Somalia, the Somali business

consequence becomes a severe dynamic inconsistency monetary policy context faced a huge risk and the private sector of the Somali business

under discretion. Rogof [4] suggested that conservative CBs can reduce could not continue to generate positive multiplier efects. So there is

bias by delegating the conduct of the monetary policy but consequently

a need to rebuild a credible CB of Somalia under the following three there appeared some smaller inlationary bias could be remained. directions: independence, transparency, and accountability.

Ironically, both CBs and governments need a contract approach to

1. design a monetary institution that mediates them. Apparently, this How Somali central bank can be credible in terms of political,

institution is made of a body – tri-partite oicials from government, inancial, and monetary policy independence?

CB and the parliament. he responsibility of the monetary institution

2. How can be examined the types and the degree of transparency is to structure a contract (optimal contract) between both parties: the and can be settled ways to measure the transparency of the

government and CB.

Somali central bank? Walsh [35] proposed that an optimal contract can entirely Does central bank of Somalia have clear and well deined

3. eliminate bias if the CB is advised to make the correct output amount inancial accountability structures?

stabilization. Svensson [36] explained the optimal contract can be used as a means of inlation targeting. If a CB has long run price stability

Recently, the desirability of CBI became a popular feature in path and its aim is to make the output target equal to potential or monetary making institutions like CBs to attain their objectives such

the employment target equal to its natural level with the help of as price stability. Basically CBI depends on two pillars: theoretical

authority delegation to CB instrumental independence can bring the and empirical. Before anything else, it is better to understand the

ideal institutional arrangement [37]. he CBI rationalization outlined roles and primary responsibilities of CBs. Central banks have four

above is mainly based within the context of an inlation bias because traditional roles: conducting monetary policy; preserving inancial

of the primary motive of monetary expansion in both developed and stability; supervising and regulating banks; and safeguarding payment

developing economies. In the case of the developed countries, wide and settlement systems. Keeping and making sure the price stability

capital markets allow their governments to borrow and inance deicits and inancial stability is the irst primary responsibility a CB has to do.

without raising the cost of borrowing too much. But in developing without raising the cost of borrowing too much. But in developing

is showing that countries with currency boards inlation is 4% lower his revenue motive for monetary expansion leaves behind a social

than in countries with other types of exchange rates [43]. When the ineicient bias [34].

currency board is maintaining ixed exchange rates by having suicient holdings of the foreign reserve currency, this means the board is giving

To credibility, CBs anxiously seek to build their credibility especially conidence to investors and the public in general [45]. during periods of disinlation thinking over the prioritization of two

matters: (1) upward sensitivity, (2) inlation deviations to downward Finally, one must not confuse the responsibility of currency board from its targets. For this, a CB needs to make sure not to miss the

with independent CB responsibilities. he currency board assists the inlation target either from below or above. When a CB for example

operations of an independent CB in a complementary way which tries to connect some level of its credibility to a precautionary demand

is proving to the public the monetary policy management would aiming to price stability, then the CB is waging to extremely restrictive

continue undisturbed by political intervention or any pressures from average policies because theoretically there is a precautionary demand

the government. Currency boards cure credibility deicit in countries for expansion in one way and precautionary demand for price stability

where CB institutions are new or their performance is not good due on the other way. hese two policies; demand for expansion and

to poor track record. he members in the currency boards are usually demand for price stability easily tend to ofset each other because

selected from the ranks of technocrats, economists, and bankers – they the precautionary demand for expansion creates inlation bias while

are appointed to stay long term in oice to make sure the exchange the other causes delation bias. Ater the CB stabilizes inlation, the

rate policy is in the hands of independent authority free from strategic precautionary demand for expansion might remain to restart the risk

incentives to change direction toward improper deviations or wrong of average inlation bias [38].

expansionary course [39].

Economic policy and policies themselves fall into separate To transparency and accountability, there are two views; one view directions – economic policies can gain credibility from private agents

says transparency is a precondition for accountability, and the other to be efective but policies can become credible if they are efective. It is

view says transparency is the result of the accountability process. the responsibility of the central bank to develop a successful economic

Although these two views are related to each other, transparency policy in which its viability and reliability depends on the perceptions of

represents the whole society including media and inancial markets to private agents. Credibility cannot be sustained unless economic growth

ensure whether central bank has done its objectives through clarity, and price stability is achieved. With the respect of new classical theory

truthfulness, and eiciency while accountability represents a responsible economic fundamentals, an independent CB can prove its capability to

behavior imposed by legislation to make the CB feel accountable as it is promoting development and economic growth [39].

undertaking monetary policy actions because accountability is directly happening to the conduct of monetary policy [20].

Surprisingly, the emerging economies are increasingly developing the design and operation of monetary institutions (Central Banks and

Central Bank Independence

Currency Boards) involving monetary policy and exchange rates. he Central Bank Independence (CBI) can be deined full independence primary aim of these institutions is to inluence the policy credibility.

from the government in issuing paper money – the authorities of the To gain inancial credibility, political intervention by the government

central bank should be commission members chosen by the votes of must be strictly prohibited otherwise the rational public would know

the parliament and there should be no any kind of relationship or the central bank inancial policies are incredible and such political

communication between the cabinet of the ministers and members interventions may end up economically inconsistent liquidity trap [40].

of the central bank commission. he state must be obliged to collect Currency board is a monetary institution and its primary

money in a legitimate way such as taxes. here is no way the government responsibility is the issuance of local currency which is fully backed

should be allowed to lend money from those who are responsible for by large stocks of a hard foreign reserve currency. he convertibility

the issuance of it [46].

of the local currency must be upon demand and unlimited into the CBI represents the institutional capacity of the central bank which foreign reserve currency at a ixed exchange rate. Also there must be

is typically an institutional mandate responsible to conduct monetary an inviolable strict line between the local and foreign currency reserve.

policy free from all kinds of political interferences from any sides As recommended by the IMF, the exchange rate must be written in the

including government, industry and other interest groups [1]. currency board’s constitution [40,41], Hanke et al. [42] Assets payable

in the foreign reserve currency and low risk interest earning securities Central bank independence (CBI) can be only found when are among the reserves held by the Currency Board. As the law may

monetary policy oicials are not involved in any kind of political or set, foreign reserve currency equals to 100 to 110 percent relative to the

government inluence to implement the monetary policy [46]. In value of the local money stock [39].

a much diferent way (Blinder) has pointed out the inevitability and desirability of a close cooperation between the CB and the inance According to Ghosh et al. [43], and Hanke et al. [42] historically,

ministry in times of crises and he proposed three diferent settings: (1) currency boards have successfully operated seventy countries. During

at times of serious inancial crises; (2) during the atermath of inancial 1990s, currency boards were operating in Argentina, Bulgaria, Bosnia,

crises, when the economy may be astounding and monetary policy Cayman Islands, Estonia, Falkland Islands, Faroe Islands, Djibouti,

may be unconventional; (3) in normal times when monetary policy and Gibraltar. he Estonian currency board was credited to having

is conventional, but he strictly recommends there must be inviolable, successfully stabilized the economy; the currency board of Argentine

clear, and bright line on monetary policy between the CB and the ended inlation and maintained stability during Mexican inancial crises

inance ministry. (Blinder) sheds light CBs lack the independence of in 1994–1995; during Asian inancial crises and from British to Chinese

non-monetary policy activities such as bank supervision and relevance rule, the Hong Kong currency board settled and maintained stability.

of authorities, for example; bank supervision and deposit insurance In the emerging economies, their currency boards proved highly

must be in the same hands. He concludes the rationality of the CB must be in the same hands. He concludes the rationality of the CB

bank are secured under the national legislation acts. he qualiication reducing inlation or keeping it low only in a short time horizon instead

requirements of the CB governor and board members; the nomination the monetary policy must be controlled by technocrats with long time

and appointment of the CB governor and board members; the term of horizons [47].

oice, and the dismissal of the CB governor can only happen by the approval of the legelative body.

Some scholars argued for the success and better monetary policy, there must be a crated cooperation between monetary and iscal

According to Ćorić and Cvrlje [51] the CBI criteria is divided policies. here is a severe uncertainty that an independent central bank

into four categories: Nomination and dismissal of the central bank controls inlation unless some preconditions of iscal policy are met.

governor and other members was the most important category. he Central bank needs to examine any iscal conditions that can support its

independence of the central bank to deine the goals of the monetary independence. It may be the consideration of two separate equilibrium

policy and the inal authority in decision making was the second most conditions: irst, the real demand for money must be equal to the real

important category. he third category searches up to what level the supply of money; second, the real value of government liabilities must

central bank deines price stability and its main goal. he fourth category

be equal to the real value of the consolidated government’s surplus measures the imposition of the central bank lending restrictions. expected at present time. he government iscal policy always ensures

if the second condition is met [48]. Apparently, there are distinctions between goal (political) and instrumental (economical) independence. CBI basically appropriated

he relationship between central bank independence and economic with instrumental independence comes in the irst place while goal performance produced the idea of CBI empirical support with three

independence comes in the second place. he more the government main conclusions: Firstly, there is a negative relationship between

implements monetary policy independently the more the chance the central bank independence and long term-inlation. here is a low

central bank would have oppertunities to solve the problem of time inlation rate in countries with independent central banks compared

inconsistency, Debelle and Fischer [53].

in countries with their central banks are subject to government control. Secondly, there is a negative relationship between central bank

According to Eijinger and Haan [54] two more types of independence and GNP when the long term budget deicit is expressed

independence appeared: individual and inancial independence. as percentage. Countries with independent central banks have much

here is a positive solution by the presence of the government oicials lesser deicit than those countries with their central banks are under

in the boards which empoly people but the implications of inancial government control. hirdly, the central bank independence is not

independence shows negative impact if the government tries to be afecting negatively to the production or employment during over the

involved in any kind of credit relations between the central bank and long term [1].

the government itself. he most important factor in the role of CBI is “time” to implement consistent monetary policy.

According to several studies with empirical results supporting central bank independence provided by Grilli et al. [21], Cukierman

In the history of the European Central Bank (ECB), the experts et al. [14], Alesina and Summers [49], all these studies reached the

outlined ive types of independence as preconditions for optimum same conclusions showing that there is a negative relationship between

implementation of the monetary policy: institutional independence, central bank independence and average inlation. Consequently, the

legal independence, personnel independence, functional and central bank independence improves the possibility of reaching low

operational independence, and lastly, organizational and inancial inlation goals without real economic costs. On the other hand, if

independence [51].

policy makers employ incentives of expansionary iscal policy giving

Increasing Role of CBI

the possibility of creating surprise inlations make the monetary policy implementing low inlation policy incredible in the eyes of the public

For many years, there was a problem of independence, how [50]. he ability to halting inlation expectations at a level that can be

independence is to be measured and how CBI inluences macro- suited with monetary policy objectives brings reward of credibility to

economic variables. In 1970s and 1980s most of the developed countries CBs [51].

experienced high and continuous inlation rates. Two authors, Barro and Gordon [32] explained the reason why? hey proved that central

In general, CBI falls into two categories: independence of goals banks set variables above their natural values which makes possible the and independence of instruments. Goal independence refers how it

balance of external and internal to happen and the result became high is possible for the central bank to determine the goals of its activities

inlation rates. he public wanted to know the truth – they asked why without being involved by the government. When it comes to the

such high inlation was happening, they needed explanations about instrumental independence, the central bank needs absolute freedom

the motives of the central banks, the subject of the price stability to to select the instruments that can make possible for the bank to achieve

economic growth and the reason why the economic objectives were its goals. Ćorić and Cvrlje believe this division was accepted by most of

became unrealistic? he answer was clear, there was an inconsistency the authors in papers written in 1990s [51].

of monetary policy and the behavior of central banks was motivated by political inluence. he ruling parties have always been oriented to

According to Lybek [52] to CBI is identiied as formal and efective short term economic gains. It is a common knowledge to everyone the (actual) independence. he formal (statutory) is a type of CBI stipulated

expansionary monetary policy is a unique solution but it always ignores and guaranteed by legislation that could possibly be divided into three

the short term inlation efects. he solution of the problem seemed the stages: when independence is established by international treaties

CBI is to be increased.

like the european central bank (ECB); the practice of constitutional independence like the CB of Switzerland; and establishment of

Although the increase of CBI was a way tremendously intended independence under national legislation acts. (Lybek) advocated

to reduce inlation rate, ater a time new reasons emerged. Cukierman the safeguarding of goal and instrument independence can only be

[37] suggested the increased independence was due to by two factors:

(a) global and (b) regional. he idea of liberalization strongly advanced in an unweighted average (LVAU) and weighted average (LVAW) [60]. to all segments of economy, and especially inluenced capital low and the expansion of capital markets, and the need for stable macro-

Which one is beneicial for the society; a democratically elected economic conditions was highly increased. Both domistic and foreign

government creating a socially high cost inlationary bias by trying investors put their trust to a higher level of CBI with greater eforts

to achieve objectives like high employment and easy inancing of focusing to prolonged price stability.

government expenditures or a consrvative central banker which has primary concerns about price stability than government does? he

Regional contribution motives that increased independence were answer is clear. he only main objective of monetary policy that a CB as follows: (1) ater the institutions formerly designed safguarding

should focus is the monetary policy on price stability. To be realized this nominal stability, like the European Monetary and the Bretton Woods

focus of the bank efectively the bank must get suicient backup of legal systems have been brokendown, a new search for alternative institutions

independence in the choice of monetary policy. Receiving explicit or has emerged; (2) the highly independent German Bundesbank showed

implicit instructions from the government oicials is strictly forbidden

a good track record in assurance of nominal stability; (3) Maastricht by laws of the central bank mandate. Suicient personnel and inancial treaty by EEC prerequisited central bank independence upgrading for

indepenence is a gauge showing central bank legal independence which the membership in the European Monetary Union, taking Bundesbank

is giving the central bank the capability to resist political pressures and as an example; (4) ater inlation has been successfully stabilized, policy

enough capacity to prepare constraints against the government’s ability makers commenced thinking over institutional arrangements which

resorting inlationary inancing [61].

have the capabilities of reducing future inlations. Increasing central bank independence appeared a live natural way and could have a high

According to Haan and Sturm [62] CBI measurement usually possibility to achieve this objective; (5) the former socialist countries

encounters disputes and problems like unexplicit laws that cannot make tried to create institutional frameworks in order to have better and

clear speciications about the line of duties between two authorites: the orderly functioning market economies. he realization of industrial

central bank authorities and political authorities under all possibilities. economies that legal independence is negatively related to inlation

his always brings unclear indicators of actual independence compared motivated the grant of substantial de jure independence to many

to legal independence. Cukierman [14] believes industrial countries central banks [37].

may show better proxies measurement for actual independence than developing countries. herefore, Cukierman [30] and Cukierman

Measurement of CBI

et al. [34] developed central bank autonomy which was based on the To measure central bank independence, the following four

central bank governor’s term oice instead on central bank laws. It is categories can make a CB more independent: (a) the appointment of

clear, this literature is turning the understanding to a higher turnover the central bank governor not by the prime minister or minister of

of central bank governors indicates a lower level of independence. inance but by the board of the central bank. his brings the central

Until now, a few studies have used the TOR of central bank governors bank governor not to be subject dismissal and has to stay a long term

as an idicator for CBI and the matter was concluded the existence of in oice. In the appointment process, these features are important

inlation performance between developing countries and the TOR of preventing the governor of central bank pressures from politicians; (b)

central bank governors. his literature has a drawback – the studies policy decisions of the CB must be made without direct involvement

available until recently are all based on the data of Cukierman [30] and of the government; (c) the charter of the CB must give its irst priority

Cukierman et al. [34]. De jure and de facto indexes necessary to measure making price stability the primary goal of the monetary policy; and

central bank independence are as follows: Political independence (inal inally CB independence is in a higher position when the ability of the

authority; the presence of the government representative in the central government to borrowing from CB is limited [55].

bank board; the degree in which the government appoints the board members; board members’ number; board members’ tenure; and

According to the pioneering work of Bade and Parking [23], the central bank governor’s tenure), Financial independence (inancial measurement of formal independence can be based on legal criteria

and iscal independence; the authority which stipulates the check and of political (goal) and economic (instrument) independence. Later

balances of the board members; and the authority which determines the Cukierman, Webb, and Neyabti [34] developed a comprehensive index

proit distribution), this is the irst attempt measured in 12 developed an LVAW of CBI. It is a measurement which gives a numerical weights

countries [23]. Economical independence (budgetary deicit monetary to each question.

inancing; and monetary policy instrumrnts), Political independence Bade and Parking [56] and Banaian, Laney, and Willet [57] started

(governor’s and board members’ appointments; the relationship the irst attempts at measuring central bank independence. BP divided

between central bank and government; and fundamental law), the central banks into four classes by using three dimensions of central

second attempt measured in 18 developed countries [24]. LVAU and bank structures: (1) inal authority over monetary policy making;

LVAW unweighted and weighted measures respectively (governor; (2) no government oicials in the boards of central banks; (3) board

monetary policy making process; monetary policy objectives; members independent of government appointment. Alesina [58]

limits upon the unguaranteed borrowings; limits upon guaranteed supported the work of BP introduced marginal coverage criterion

borrowings; terms of lending; potential beneiciaries of the central inspecting the ability of monetary policy to resist the pressures of

bank borrowings; imposed limits upon the central banks borowings; iscal policy possibly monetize debt. Grilli, Masciandaro, and Tabellini

maturity of loans; restriction on interest rates; and prohibition on [59] proposed an index of eight features equally weighted summation

lending on primary market), measured in 68 developed and developing approaching interpretations of central bank laws and disagreements.

countries Cukierman et al. [34]. TOR (Turn over rate of central bank Cukierman, Webb, and Neyapti [34] produced the most popular

governor), measured in 19 developed and 39 developing countries [63]. measurement of central bank independence. hey considered 17

he possible meausrement limits of CBI is usually outlined into diferent legal attributes by using a variety of scales measurement like

four categories: personnel; policy objectives; policy instruments; and two or three point scales and as higher as seven point scales sometimes

inancial independence. In personnel independence, there must be legal inancial independence. In personnel independence, there must be legal

a monetary policy action that could change, for example , the central the primary monetary policy objectives of CBs to maintaining price

bank inancing rate – the prevailing of this matter necessitates the stability. CBI is also measured by checking the policy instrument of

existence of time lag (which empirical research shows it could take 6 up the CB because, central banks achieve their monetary policy objevtive

to 8 quarters) between monetary policy action and the response of the through policy instrument independence. Finally CBI is measured by

inlation rate. his time lag changes the transparency into opacity and the inancial independence of a CB. here mustn’t be interdependence

the public feels diiculty to monitor and evaluate how the central bank between government and central bank in budgetry matters. his assures

is doing its actual commitment to inlation rate targeting. A central bank the determination of iscal policy and budget of the central bank not

always has a course of policy actions and the public has expectations of allowed to be a subject to executive or legislative decisions [64].

inlation. When the inluence of public expectations and the credibilty

Transparency

of central bank and maintainance of its independence act accordingly the target becomes credible and the inlation expectations are reduced

Central bank transparency (CBT) refers as an atmosphere which to minimum level. In terms of employment and ex-post real interest is favorable to the side of the public in terms of the accessibility,

burden creates costly unsuccessful operations trying to bring down understandability, and timely basis of the information about the

high inlation rates to lower target rates. If disinlation social costs gets objectives of the monetary policy, its legality, institutionality, and

higher the implementation of disinlationary policy politically becomes policy framework, monetary policy decisions, the information related

very diicult and central banks lose their instrument independence [1]. to monetary policy, the terms of central bank accountability, and the

Eijinger and Geraats [26] has distinguished ive types of transparency: rationality of monetary policy and its data [65].

political, economical, procedural, policy and operational. Eijinger and Geraats used a normalization technique the minimum score

According to Geraats transparency is deined as, when, the being 0 and the maximum score 1. At this moment the researcher information between monetary policy makers and other economic

agents is symmetrical. Geraats is advocating that transparency is likes to describe these ive types of transparency one by one: (1) new and largely responsive to the best practices of central banking.

Political transparency indicates openness about policy objectives and Tranparency is one of the most important key features of monetary

institutional arrangements like central bank independence, contracts, policy. In 1998, there was a survey of 94 central banks conducted by

and override mechanisms that clarify the motives of monetary policy Fry, Julius, Mahadeva, Roger, and Sterne which became the most

makers; (2) Economic transparency focuses on economic data, policy understandable survey on the conduct of monetary policy. he survey

models, and central bank forecasts. his economic information is used showed a greater consideration of transparency by 74% of the central

for monetary policy; (3) Procedural transparency gives details about banks marked transparency as a vital component of their monetary

the monetary policy strategy and policy deliberations account through policy framework. Lack of transparency generates opacity, which leads

minutes and voting records. his typical provision describes the way to asymmetric information, then, the result becomes uncertainty.

monetary policy decisions are taken; (4) Policy transparency is a form If both central bank and private sector have the same information

of policy inclination that embraces explanation of policy decisions and about the structure of the economy, then, it appears that transparency

prompt announcements and indications of likely future policy actions; prevails. However, transparency doesn’t mean perfect information or

(5) Operational transparency supports operating instrument to control full certainty.

errors. It also prevents macroeconomic transmission disturbances. his whole process concerns the implementation of monetary policy

he beginning of central bank transparency characterises in a

actions.

number of intertwined mechanisms. First, transparency includes bulky means to pressuring the government to be more responsive to the

Measurement of Transparency

public. Second, transparency is a primary key of accountability which According to Fry et al. [66] measurement of transparency covers is getting support from central bank independence. hird transparency

a wide range of aspects on monetary policy frameworks ranging from enhances the communication between markets and policy decisions.

institutional characteristics to policy focus and monetary analysis. In a transparent atmosphere investors are aware of policy action. In

(Fry) constructed indices in which he included a measure of policy good transparency, there is less chance of inancial distress caused

explanations primarily based on (1) if central bank prepares explanations by sharp movements of asset prices ater policy changes happen.

of policy decisions; (2) the publication preparations of forward-looking Fourth, transparency enhances policy credibility, policy lexibility, and

analysis; (3) assessment explanation and analysis (bulletins, speeches, credibilty of central bank’s commitment [55]. and research papers). But, here, the researcher inclines to present other

he internal decision making process of the central bank depends on types of central bank transparency measures: Siklos [25] measured transparency. Central bank achieves its mandate through transparency

central bank transparency in 20 developed countries and European that explains the uses of diferent instruments of monetary policy.

Central Bank. He constructed indices composed of the following 11 Transparency needs well deined monetary policy strategy and a timely

main variables: publication of minutes of central bank meetings; key statistical data in the form of publications and forecasts on which

assumptions in generating outlook; publication of committee voting the central bank bases its decisions. hese days, there are academic

record; regular information published about how monetary policy comunities and political audiences who bases their arguments and ideas

decisions are made and their justiication; operational instrument on the favorabilty of transparency in monetary policy. here are four

of monetary policy; instrument independence; are monetary policy categories on which an IMF code called “good practice on transparency

and operational objectives the same?; special recognition of the role in monetary and inancial policies” is structured. Categories are

of inancial system stability; economic modeling procedures; forms as follows: (1) clarity of roles, responsibilities and objectives; (2)

of communication; and publication of a monetary policy strategy formulating open process and reporting policy decisions; (3) public

and limits of monetary policy. Eijinger and Geraats [26] measured availability of information policies; and (4) integrity of accountability

central bank transparency according to their ive types division. Each and assurances. Inlation rate targeting has especial importance in