The transparency, business going with the current central and central banks in historical periods had a wide difference in comparison. Central banks are the business units, which are privately owned suppliers who lend credit to the government. Where they were competing with the other financial institutions presently. The central banks are maintaining privileged relationships with the states and the heads of the state himself. Where initially the central banks treated the information of the decisions and pricing as so confidential as known only to the banker and his client, which can be said as less than the transparent as for decision-making is understandable given the circumstances of the time.
By the time being, the central banks are gradually changed to the modern competency of regulating the supplies of money and credit. They got typically into the era of commodity money. The important element of transparent in central banks is obligation of converting their liabilities to the fixed rate of exchange in their operations. As observers knew something about the central bank primary objective is to give absolute priority to the maintenance of convertibility and the typical changes in the rate at which discounted other obligations to regulate currency fluctuations. Reflecting to the semi public or the normal public, it publishes the changes in the gold reserves that were used by the market participants of forecast likely future policies. Where in these modern period studies, the economists and other people were treating this pegged exchange rate as the dimensions of the transparency, so the central banks are maintaining a peg to the other conducting public policies more transparently equally to other things. So in earlier periods, the transparency in a central bank and other commercial banks are used to enhance the accountability, which is most sophisticated transparency tool was made socially accepted one to public, shareholders and other mixed motives of this bureaucratic autonomy.
As the banking sector are passing through 20th century and there are exceptional situations, where the central banks can't reveal the further information regarding their operations. The transparency system in central banks can be used to making judge on its flexible exchange rates of the country. This why because, at the present the central banks are dealing with foreign exchange of different countries is increasing from the last ten years, so this is the reason to accelerate the banks to go for the lend transparency to monetary policy has been disappearing. This makes the central banks to make more aspects of transparency, which is accountable to the ultimate stakeholders. The more recent trends emerged in this 20th century are financial liberalization and political liberalization. In this, the first one is providing flexibility to the central banks regarding the exchange rates at the same time of monetary policy is financial liberalization and other is making difficult to privileges to the central banks to make decisions about the transparency due to the political conditions and pressure from the politically due to the economic variables, which has to be considered. So it has referred as democratization. So its clearly showing that the financial liberalization showing its impacts on outcome of market variables. So the deregulation of the central bank making it not have any control of outcome directly. So its making clear again that the communication that the central banks with market participants is in regularized information transmission, that implication mentioning the extent of transparency in a central bank.
Lastly we get a questioning in a same that, what the exact level of transparency is maintaining in central banks and what are the impact of that on the central banks and the economic conditions? The theory, which provided below are answering many questions than the general queries. The emerging trends in transparency levels in central banks in recent times and the behavior of those level in different countries, and why?
REVIEW OF LITERATURE:
The economists are suggesting that the more transparency is a better option. The more communication gives the market participants or the agents to make more efficient decisions on the central bank. Second thing they suggest that the removal of one distortion doesn't show any efficient allocation till the other distortions are in live. The way central bank makes the things under the parameters, which should not create any disturbance to society to the acts of the central banks, which raises the uncertainty. Fausel and Stevenson (2001) clearly stated the benchmark model about the uncertainty by the objectives of central bank shift over time. The same familiarity can be observed in the Borron Gordon (1983), about the sudden adverse actions take place by the bank increase in output gap, so the expectations regarding the inflations rises in the public. Which makes the more appropriate then the objectives have changed when the inflation becoming less attractive. Thus transparency is missing target.
Geraats (2002) is suggesting the effects of the greater transparency makes the objectives of central bank into more trouble in mainly two periods. One is observed at the inflation in period 1, where the people look toward their priority, and the decisions were taken in period 2. As Fausel and sevenson is right that the greater emphasis removes the uncertainty about the situation of inflation but at the same time, additionally it removes the curtailed of central bank toward the inflation in period 2, which is a big disaster. So it clearly making that, more the transparency reverses the welfare to the public.
As for the cukieman and Gersbach (1998) are stating that the second class of models with the same set up for observing the information regarding the sharing the information about the economic conditions and with the objectives of central banks. The revealing of the more private secrets of central banks also make the disturbances in stabilizing of the monetary policy of a nation and show the higher variance in the inflation and output. So the higher the transparency about the conditions of economy may also reduce the social welfare.
Previous empirical work:
The empirical studies and research show the extent and the effects of the transparency towards the central banks are still in their infancy. These create many positive and negative impacts of transparency on these various financial and economics conditions.
The recent studies of many institute and the corporations regarding the comparison of measuring the transparency of different individual central banks, but these studies are stick to limited number of banks, some time to the single point at a time and the surveys are stating of five different kinds of aspects get in to the transparency by the central banks. The distinguished five transparencies are:
- Political transparency
- Economic transparency
- Procedural transparency
- Policy transparency
- Operational transparency
Where these five aspects of transparency are come in to light commonly from the central banks of different nations. The political transparency one, which make reveals the things about the policy objectives and the statements of the objectives, and the explicit the goals and qualifications in cases of multiple basing on the prioritization. The economic transparency deals with the data, models and forecasts. Which focuses on the information of economic mainly for the use of monetary policy in the nation. The data in economic reveals the conduct of the monetary policy publically available from the central bank. The next transparency is procedural, which opens the information regarding the way decisions are taken, votes and achievement. It involves the explication of monetary policy strategy, which explains the monetary policy framework in the central bank. The policy transparency (openness the implication of policy, announcements and explanations about it.) and final transparency is the operational transparency, which deals with implementations, disturbances in microeconomics, and policy actions. Which involved the discussions regarding the control errors in policy target achievement. These dimensions are constructed from taking the basis of nine front row central banks as for 2001 June. The nine front row banks are Reserve Bank of Australia, Bank of Canada, ECB, and Bank of Japan, Reserve Bank of New Zealand, Swedish Riksbank, Swiss National Bank, Bank of England and Federal Reserve. In this list, there are certain banks are top in the transparency and some are in bottom. Different authors like Bini-Smaghi an Gros (2001), Eijffinger-Geraats and Amtembrink and Waller (2004) are developed almost the same concepts by taking different number of banks and some banks from well advanced industrial countries.
A number of authors and economists like Demertzis and Hughes Hallett (2003) have used these and many other methods to examine the relationship with financial and economic variables with the using index of Eijffinger-Geraats to examine the relationship between the transparency of central bank and variability level in inflations and gap of the output in the economy. The study revealed that there is negative relation between the inflation and transparency in central bank but not among the variability of inflation and transparency. The study is also revealed that there is negative relation between the transparency and the output deviations averagely but it showed the strong relation between the output variability and transparency in central banks o f the nations. The literature theory proves that there are various systemic reasons behind the central banks going for less or more transparency basing on their countries economic structure and on the variables of the economic and financial interests.
The regression analysis is used to characterize the differences in transparency of different nations' central banks over the time. The goal is here to explain about these variations and get the instruments, which can use for analysis of transparency effects. So analyze the transparency on the basis of inflation, openness, and final depth. In addition we can include the political transparency determinants like the rule, law, stability, accountability of banks, and government efficiency in to consideration. So it can be clearly observed that the central bank of nations with inflation history is having more transparency. Which is not making comparison of transparency between the developing and advanced nations. And also the nations of open economies are observed to be less transparency and this is not to make in high profile cases of New Zealand and Sweden. So by this we can say that, the countries with developed financial market are seen to be more transparency. The more transparency can be possible with nations stable political condition and higher in terms in rule of law. The variations are time series of data is telling us that why banks go for the higher transparency. The variables like the financial and economic make associate higher monetary policy in transparency of central banks, which shows the reverse signs of coefficients on past inflation and openness. The nations of down inflation are of better transparency, monetary policy and well communicate with their principles and the public.
By this analysis, we can confirm that higher transparency in nations, which are with a greater stability and politically, developed ones and more depth financial markets are possible. There is surprise, that's negative association among certain components in transparency and economic openness although this association can be questioned.
Effects of Transparency:
Now we can discuss about the effects of transparency from previous studies like (viz. Mishkin 2004) is saying that the higher transparency in a central bank should reduce the uncertainty about the future policies and volatility of inflation. Financial depth is having the negative shade over the inflation variability. These two variability's are sighing and significance, when they get together. So this making that more transparency in a monetary policy allows the public to take actions more quickly, before the authorities are taking the actions to manipulate inflation regarding to safeguard the interest of objectives.
In most of cases, the transparency is entering in to negative side and instrumented appropriately.
The transparency at higher level must be associated with more output volatility because of preventing the authorities from actively using the policy for offset the fluctuations in a market. Our results must be a tentative, since we use the annual reports of data for the sample of countries, forcing to measure output as the standard deviation of the growth rate over last tree years. So our regression analysis suggests that there is a negative effect of monetary policy on the transparency on output.
There is a great transparency built in the central banks of many nations in the recent periods. There was a political hand involved in the changes of monetary policy environment. The way of ensuring the accountability to makers of policy is a traditional approach and the public monitoring with the exchange rates by a government with control, shows the flexible exchange rates and the independence of central banks.
In this, I have analyzed the information on the extent of trend and provided some analysis on it. It was a general trend, where the number of central banks is moved towards the greater independence direction in recent years. From this a question can quote that whether it can prove the durable or passing phase. The answer is followed through the particular consequences. If there are institutional arrangements that can make positive outcomes that retain support from the public, then this shows the existence of greater monetary policy here.
The other way of justifying the above question that whether changes in larger environment policy insists more transparency in central bank's monetary policy will be rolled back. There is a pegged rate of exchanges as response to liberalization of financial and greater central bank independence as in form of insulting monetary policy from short-term political pressures in democracies. The greater transparency can be achieved only with the financial and political democratization.
In any country, the level of transparency in central banks must be in a way that benefits their principle agents, public and shareholders and enabling them to have useful information. In same way, the central banks has to safe guard their own interest by not revealing the issues and information of situations of economy, which create confusion and results in a mislead.
- Barro, Robert and Roger Gordon (1983), ìA Positive Theory of Monetary Policy in a Natural Rate Model,î Journal of Political Economy 91, pp. 589-610.
- Bini-Smaghi, Lorenzo and Daniel Gros (2001), ìIs the ECB Sufficiently Accountable and Transparent?î European Network of Economic Policy Research Institutes Working Paper no. 7 (September).
- Demertzis, Maria and Andrew Hughes Hallett (2003), ìCentral Bank Transparency in Theory and Practice,î unpublished manuscript, Netherlands Bank and Vanderbilt University (January).
- Eijffinger, Sylvester and Petra Geraats (2002), ìHow Transparent are Central Banks?î CEPR Discussion Paper no. 3188 (February).
- Geraats, Petra M. (2002), ìCentral Bank Transparency,î Economic Journal 112, pp. F532-565.
- Mishkin, Frederic (2004), ìWhy the Fed Should Adopt Inflation Targeting,î International Finance 7, pp.117-127.