Fatih Özatay, PhD - [Archive]

The pursuit of transparency (1) 15/11/2012 - Viewed 1652 times

Although certain monetary policy models go out of date and are replaced by more fashionable ones, transparency was never abandoned as a principle.

Looking at the last fifty years, it is clear that monetary policy practices in market economies have changed radically. For instance, there was a period when the mainstream monetary policy was that central banks declared in advance when and at what rate the liquidity will be increased. Then, circumstances changed; the “monetary control” approach was left and replaced by inflation targeting regime.

In the aftermaths of the global crisis, the failure of the inflation targeting regime to preventing financial crisis was raised increasingly as a matter of debate. The search of the world for a new monetary policy framework was addressed in detail on this column several times. The search will most likely raise a new monetary policy approach as the policy fashion and this fashion will catch on increasingly among central banks.

While the fashions changed, there was another important development in the monetary policy arena in the last decade. Theoretical studies put forth on reliable accounts that transparency would facilitate central bank operations. As a result, market economies started to adopt more transparent monetary policies. The objectives of central banks were expressed clearly in respective laws. Central banks started to share the economic situation with the public via reports. These analyzed how the outlook of the economy may change in the period ahead and discussed whether or not the changes will enable convergence to the monetary policy objectives. In this context, these reports presented important information on how central banks will use available monetary policy tools.

Although certain monetary policy models went out of date and were replaced by more fashionable ones, transparency was never abandoned as a principle. Indeed, a bigger emphasis was put on steps are taken to ensure transparency lately. For instance, we all know that the Fed will keep interest rate at a remarkably low level until mid-2015. The Fed made this declaration in September: we are talking about policy certainty for almost a three-year period.

It is useful to employ the transparency perspective on Turkey’s monetary policy practices too. I am planning to write a couple of columns on this issue occasionally. There are several questions in my mind: for instance, the main communication channels of the Central Bank of Turkey are the Monetary Policy Committee decisions and meeting minutes and the inflation Merkez report.

These were designed during the inflation targeting regime, in line with the needs of the “single objective-single tool” era. Yes, they are useful as tools but are insufficient when the Central Bank has objectives other than ensuring price stability. We have to think about this. Another question is about whether or not the Central Bank Law should be changed. The current law states that “inflation target shall be decided jointly by the Bank and the government.” Now, however, the Central Bank has other targets about credit growth rate or real exchange rate. Should the Central Bank Law address these targets? Or should the Central Bank stick to the common target of “financial stability” and consider the others as interim targets? Does this possibly damage transparency? If it does, would it incur any costs? Let’s think about these together.

This commentary was published in Radikal daily on 15.11.2012