Central Bank: Credibility, Accountability, and Social Responsibility
In order to discharge its statutory duties the central bank must be credible. If there is no credibility in the actions of the central bank, it is most unlikely that monetary policy goals will be achieved.
It is widely believed that the post Second World War success of the Deutsche Bundesbank was largely due to the general social consensus that monetary stability is in the national interest (Goodman, 1992; Hall and Franzese, 1998; McNamara and Jones, 1996), although there are also opinions which doubt that the German economic miracle was due to the Bundesbank prior to the 1970s, and especially in the early years of post-war modern Germany (Holtfrerich, 1999, as opposed to Goodman, 1992). As we have already seen, in order to strengthen credibility in the 1990s, a world-wide argument developed for the institutional independence of the central bank, fairly narrowly understood, as breaking mutual dependence with the national government. It has traditionally been perceived that politicians are short-sighted and interested only in election victory, while sound monetary policy requires a long view (due to implementation time lag), a high level of professional knowledge and a reason to exclude democratic (or populist) pressures of the day, and consistency. Other economic policies can suffer less damaging effects from the political factor of the day by being closely involved in decision-making. Certainly, credibility, or rather credible commitments, are very important for the good functioning of institutions (North, 1993). If there is no emphasis on the proper functioning of any social institutions, it is difficult to expect that any credibility will be built. As we have already seen, independence was largely perceived to be a prerequisite for central bank credibility in the 1990s with ‘an excuse’ of the need to fight inflation and to prevent the political business cycles motive to be prevalent in monetary policy decision-making. However, the credibility of the monetary authority has its public component that relies heavily on the public perception of the central bank and its commitment to the promulgated goal(s). Even before the very popular ‘independent central bank movement’ of the 1990s there was a claim that policy makers should make known their intention to maintain low inflation despite the benefits of surprises (Kydland and Prescott, 1977). So, the usual argument that governments are generally obsessed by short-term goals, especially on the eve of general elections, may stand to some extent; but it is very difficult to perceive that someone may claim political credibility by promulgating unsound policies of any kind. It is hard to believe that ill-conceived policy-making could land someone a landslide election victory. Also, there must be some level of general trust towards public institutions to see central bank policies endorsed and central bank projections supported by the public. Often in the dominant literature the concept of social trust is somewhat forgotten.However, as we have pointed out, at the very beginning of the twenty-first century we believe that only an independent central bank delivers sound monetary policy, although practice has shown that central bank independence does not necessarily fight inflation as such. Consequently, the main focus shifted to the processes of formal ‘professionalisation’ of the central bank in order to strengthen the overall social institutional framework. The recent research suggests a much wider delegation in policy decision-making, and an even stronger formal independence of the central bank, although it is not completely clear that there is a causal link between bank independence and effective monetary policy. It seems that it is, at least, a European trend to see the central bank as a supra-organization which acts as an independent agency. However, in the New Public Management concept, independent agencies are accountable to the government department or to the cabinet.
If the supranational European Central Bank is brought into the picture, the situation becomes even more elusive. The European Central Bank was made independent of the national central banks that create the system of European central banks, of the relevant national governments, and finally of the European Commission.So, how can the problem of accountability be resolved? In a classical model, the central bank is expected to submit reports once or, more usually, twice a year to the state authority. In some cases it was submitted to the government, in others to the President or the legislative power - the parliament. The independence the central banks gained in the 1990s led to a situation where monetary policy decision-making was equated with a ‘holy grail’ and a belief that only highly qualified professionals would be able to deliver the expected results. As some scholars proved in their analysis (see for instance: Berman and McNamara, 1999), there is no logical argument to claim that monetary policy is special compared to other areas of public policy making. So the arguments from one side calling for the ‘delegation’ of decision-making authority to independent agencies, one of them being the central bank, require that the problem of accountability be addressed. In order words, should those who delegated continue to control the ‘delegees’? In general, principal-agent theory would argue in favour of control. However, advocates of central bank independence have a problem with that, claiming it may indirectly hamper the independence of the central bank and its ability to discharge its functions effectively (McNamara, 2002). This creates a problem, as central bank independence has three elements: personnel, financial and operational, as has been pointed out in the previous section. The first measures the degree of involvement of the bodies external to the central bank in the process of selection and appointment of the bank’s officials. The second analyses the budgetary and financial operative independence of the central bank.
Generally there is no problem if seigniorage revenue has to be transferred to the government, but the important issues are whether the bank can be forced to overshoot monetary targets or to buy government securities against its own decision. The third generally measures to what extent short- and long-term decisions have been influenced by factors outside the bank or by motives which are political in their very nature (Sevic, 1996b).In the end, the question remains as how to define central bank accountability. It seems that one way is to strengthen the link between the central bank and the legislative body, assuming that there is a difference between democratic oversight of the policy outcomes and policy implementation. Claims that ‘democracy can be dysfunctional for the economy’ and positive outcomes achieved from delegation therefore ‘can be argued to outweigh concerns about the loss of democratic accountability’ (McNamara, 2002) can be supported for the process of decision-making, but the bank must be accountable to someone for the policy results within its mandate over a longer period of time. In order to build a proactive relationship between the parliament and the central bank, it is necessary to set clear statutory rules which require the central bank to report to parliament on its performance. The parliament has the supreme democratic legitimacy within the country and ultimately is responsible for the strategic direction of the country. It is more than logical to see parliamentary oversight of the central bank performance within its defined period of time. Certainly, claims that monetary policy suffers from longer policy lags can be overcome through definition of a periodic performance review, which can be set by law or through a performance contract between the ‘nation’ (represented by the parliament) and the central bank (as an independent public agency). The shifting focus from mere credibility to accountability may result in the central bank being more socially responsible, and by its nature better integrated into the society which it is supposed to serve.
But, social responsibility experiences problems of its own, starting from its very definition.To begin with, social responsibility is a relatively novel concept in modern economic literature. Lawyers and philosophers of law (from Hobbs and Hume to Kant and Hegel) tried to define the different concepts of responsibility and accountability, while economists focused more on the profit-maximizing (selfmaximizing) behaviour of a rational economic agent. However, with the development of (corporate) social responsibility concepts (including social accounting) and (corporate) social performance models, organizations have become obliged to meet a set of social criteria. For instance, an entrepreneur who maximizes his or her well-being by behaving as a law-abiding member of society contributes to that society (through taxes, employment, and so forth). Consequently, business organizations have to maximize profit in meeting their economic responsibilities, obey the law in achieving legal responsibilities, act within the prevailing industry and societal norms in pursuing ethical responsibilities, and use their discretion to promote society’s welfare in various ways, performing so-called discretionary responsibilities (Carroll, 1979; 1991; Aupperle, Carroll and Hatfield, 1985; Smith and Blackburn, 1988, etc.). Carroll (1979; 1991) conceded that these categories are not mutually exclusive and do not give different weightings to various social concerns.
Increasing concerns about social responsibility in the business sector have focused on the public or quasi-public sector. However one defines the central bank, it is an institution of public law in all countries in the world, and part of
the tradition of building a social or social-like economy following the human losses and destruction of the Second World War. The last central bank to be ‘converted’ into an institution of public law was the South African Reserve Bank (Sevic, 1996b). So, if the central bank is really an institution of public law, should it not be subjected to public scrutiny?
As an institution of public law, the central bank can be treated as any institution and has to be subjected to public scrutiny.
Also, as an institution of public law, especially if it is in the regime of an independent agency, it has to be subject to the principles of good governance, which entail - in addition to a well-defined accountability - a regard for the public and even responsibility for the welfare of individuals affected by its actions. Being a part of the state organism it has to align with the rest of the professional public services, while remaining independent in discharging its functions. In claiming a special status for the central bank, many (economists) forgot the issues of accountability and responsibility, which is reversal of rights. Maybe the modern central banks command an independent status but modern public services require a clear allocation of responsibilities and clearly defined roles. The central bank as a public entity has its promulgated mission and should focus on policy outcomes, supporting sustainable competition and being ultimately responsible for its actions. However, it seems that many, blinded by the need for independence, simply ignored the very fact of the status of the central bank: that is, as an entity of public law, it is ultimately accountable and socially responsible.It seems that there is room for further research in this direction, focusing on the modern legal status of the central bank (as opposed to the long-lasting economists’ call for (institutional) independence), especially within the modern framework of delegation of policy making to non-majoritarian institutions; its ultimate accountability to a democratically elected body (which it may be itself); and finally its inherent social responsibility as a body in the public regime, ostensibly serving the country and, in a democracy, the vast majority of the population. However, it seems that it will be some time before this line of research is pursued, as the theory is still dominated by those (mainly the neo-classical scholars) calling for an ever-increasing independence of the central bank (as if none has been achieved up to now), although recently even they admit that the link between independence and long-term economic growth (preferably sustainable) is not clear. But, it appears that this will come into the focus simply because accountability and social responsibility find their very roots in the basic principles of natural law. And, lawyers usually resort to this when other approaches fail to deliver.