Guide Transparency in Central Bank Operations in the Foreign Exchange Market: 98

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Unification of exchange rates between the Official and Inter-bank Markets and resolution of the multiple currency problems. Facilitation of greater market determination of exchange rates for the Naira vis-a-vis other currencies. Banking Supervision Department carries out the supervision of Deposit money banks and Discount houses while Other Financial Institutions Supervision Department supervises other financial institutions. The CBN in April undertook to facilitate a formal framework for the co-ordination of regulatory and supervisory activities in the Nigerian financial sector by establishing the Financial Services Coordinating Committee FSCC to address more effectively, through consultations and regular inter-agency meetings, issues of common concern to regulatory and supervisory bodies.

Economic Reforms and Monetary Policy Direct controls, pervasive government intervention in the financial system resulting in the stifling of competition and resource misallocation, necessitated the introduction of the Structural Adjustment Programme SAP in SAP was a comprehensive economic restructuring programme which emphasized increased reliance on market forces.

Transparency in Central Bank Operations in the Foreign Exchange Market

In line with this orientation, financial sector reforms were initiated to enhance competition, reduce distortion in investment decisions and evolve a sound and more efficient financial system. The reforms which focused on structural changes, monetary policy, interest rate administration and foreign exchange management, encompass both financial market liberalization and institutional building in the financial sector. The broad objectives of financial sector reform include:. The implication of these reforms on monetary policy is the focus of this section.

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Increase in the number of Banking Institutions One of the objectives of financial reforms was to provide a liberalized and level playing field for the emergence of effective and efficient institutions that would serve as an engine of growth for the economy. Consequently, innovative institutions were encouraged to take advantage of the opportunities created by the financial liberalization policies. The structural changes in the financial sector were designed to increase competition, strengthen the supervisory role of the regulatory authorities and streamline public sector relationship with the financial sector.

As part of the reform programme, operating licences for opening bank house were liberalized. Prior to , Nigeria had only 40 banks, but the number increased progressively to in By , however, the number of banks in operation declined to 89 as a result of the liquidation of over 30 terminally distressed banks. Other types of financial institutions also increased substantially. Indeed some of these institutions, such as the discount houses and bureaux de change were not in existence before The capital base of all the financial institutions was also increased.

For instance, the minimum capital requirements of banks stood at N million with effect from December, compared with N10 million and N6 million for commercial and merchant banks, respectively, in New Products Development The reforms in financial sector created certain salutary effect on the financial system.

Some of such effects include improved service delivery through new innovations and product development. The use of modern technology enhanced service delivery and eliminated queues in banking halls which used to be the common feature of banks in Nigeria. Also, Automated Teller Machines ATMs were installed at designated points across the country to further reduce customer traffic to banks for cash withdrawals.

The use of debit and credit cards was also being popularized by some banks to reduce the risk of carrying cash for transactions. Shift in Monetary Policy Management It would be recalled that the direct approach to monetary management was the main technique of monetary policy implementation in Nigeria before the introduction of the Structural Adjustment Programme SAP. Between and , the CBN made efforts to create a new environment for the introduction of indirect approach to monetary management. A major action taken as part of the monetary reforms programme was the initial rationalization and eventual elimination of credit ceilings for selected banks that were adjudged to be sound.

After the initial test run of the indirect monetary management approach, monetary management shifted to the indirect approach in which Open Market Operations OMO was the principal instrument of liquidity management. Since the introduction of the indirect approach, the primary and secondary markets for treasury securities have been developed to take advantage of liberalization introduced through the reforms. Discount houses, banks and recently some selected stockbrokers are now very active in the primary market for treasury bills.

Interest Rate Regime In August, the CBN liberalized the interest rate regime and adopted the policy of fixing only its minimum rediscount rate to indicate the desired direction of interest rate. Goal transparency refers to transparency about the overall aims of the central bank, by which is meant broad policy objectives rather than day-to-day operational aims such as say maintaining the overnight cash rate at the desired target.

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These goals would include the specification of an inflation target, the statement of an output or employment objective, and, if both output and inflation are among the variables stated to be of concern, an indication of the relative weight typically placed upon each. Two points are worth noting, in passing, about the concept of goal transparency. The first is that it may be difficult to retain a clear distinction between the transparency of a given policy goal and the precision with which that goal is formulated.

The second point is that, even within the reduced, three-fold taxonomy of transparency considered here, there is clearly still some substitutability between the different categories of transparency. Hence, for example, a central bank which makes known both its forecasts for key economic variables and the policy actions it takes in light of these forecasts forms of knowledge and operational transparency, respectively, discussed further below , reveals a good deal about its overall policy objectives goal transparency , even if it does not explicitly state these objectives.

Knowledge transparency refers to the information provided by the central bank to the general public about: first, the data which the central bank relies upon in drawing up its strategy for achieving its overall objectives; and, secondly, how it uses that data to arrive at its ultimate strategy. This would be seen as including the periodic release of relevant forecasts of key variables by the central bank, as well as a description of the main factors driving these forecasts, the risks surrounding them, and how they influence the current stance of policy. Operational transparency refers primarily to the openness of a central bank about the instruments it uses to try to achieve its policy objectives, and about how and when it uses these instruments.

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The obvious example is the announcement of decisions regarding the central bank's short-term interest rate target. The most prominent of these relate to the publication of minutes and voting records of the committee which decides the policy stance. To assess the economic case for or against particular aspects of transparency, the first point to note is that the overwhelming majority of the literature on these issues is theoretical rather than empirical.

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Within the theoretical literature, a recurring theme of the overview presented here is that many of the findings depend crucially upon the details of the modelling framework adopted, especially regarding: the treatment of uncertainty; the way in which monetary policy affects the real economy; and the precise nature of the central bank's objectives whether revealed or not.

As such, many of these findings do not, unfortunately, appear to be robust across a range of different analytical assumptions. Beginning with the theoretical literature on goal transparency, two central themes of the modelling on this score are the issues of time-inconsistency, and of the impact of transparency on expectations formation.


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Eijffinger, Hoeberichts and Schaling , for example, develop a model in which transparency, in the sense of reduced uncertainty about a central bank's relative preferences regarding inflation and output, is beneficial because it helps to fix inflation expectations, and so reduces both the mean and variance of inflation. Using a similar model, Canzoneri finds that increased central bank transparency should also help to overcome the time-inconsistency dilemma facing central banks — that is, the assumed temptation to seek superior economic outcomes by saying one thing and subsequently doing another.

In a model in which such time-inconsistency can result in reputational damage, increased transparency will diminish the incentive to behave in this way. A further strand of the literature on goal transparency concerns the implications of learning for monetary policy and central bank communication. In an important recent series of papers, Orphanides and Williams a, b consider a model in which the general public, although aware of the broad structure of the economy, do not know the precise quantitative details of that structure. These details, embodied in the parameters of the model's equations, depend upon the objectives and preferences of the central bank, which are unstated, so that the public is assumed to have to infer them through observing the central bank's actions.

Not all theoretical models, however, support the notion that greater goal transparency is necessarily economically beneficial. For example, Hahn develops a simple model in which the optimal trade-off between transparency and opacity in the central bank's objectives depends on society's relative preferences for output stabilisation versus low inflation.

As regards this latter point, it seems quite plausible that the potential benefits from increased goal transparency may be smaller for central banks which already have a good track record in achieving desired macroeconomic outcomes. With regard to knowledge transparency, the theoretical literature is again inconclusive. A number of papers Cukierman ; Gersbach suggest that disclosure of forecasts by central banks could undermine the effectiveness of monetary policy. However, these results rest upon a modelling assumption that only unanticipated monetary policy actions affect output. In a different vein, various papers outline a role for knowledge transparency to improve private sector information Romer and Romer , and thereby reduce aggregate economic volatility Tarkka and Mayes Once again, however, this latter finding is model-dependent, since Morris and Shin present a model in which, even though central bank forecasts are superior to those of individual private agents, their publication could still lead to increased aggregate forecast errors.

The mechanism here is that individuals, whose forecast errors previously tended to cancel out, might all shift their forecasts towards those of the central bank, resulting in the latter's forecast errors becoming aggregate errors. A further set of papers for example, Jensen focus on a potential trade-off between credibility gains for a central bank from increased transparency, on the one hand, and a possible loss of flexibility in its policy actions, on the other.

The concern here is that a central bank which reveals both its goals and its forecasts may find itself undesirably constrained in its response to the range of different shocks which may strike the economy. However, rather than providing a case for central bank opacity, this could be argued to provide support for central banks casting their goals in a suitably flexible manner — acknowledging the fact that different shocks to the economy may call for different policy responses.

Overall, what lessons can we draw from this survey of the theoretical literature on the economic consequences of different forms of central bank transparency? Certainly, there are some findings which appear to be reasonably robust, such as the insight that goal transparency principally, the announcement of an inflation target can create a sustained institutional incentive for a central bank to pursue desirable macroeconomic goals, with associated benefits in terms of the anchoring of the public's expectations. Many of the theoretical results, however, appear to be very model-specific, and highlight that increased transparency can sometimes do more harm than good, depending upon subtle features of the monetary policy framework and the expectations formation process.

As such, they suggest that, while a high degree of central bank transparency is likely to be desirable on economic grounds, it is certainly not automatically the case that more transparency will always be better. By comparison with the theoretical literature, empirical evidence on the effects of transparency is relatively scarce. In large part, this reflects the problem that transparency is virtually impossible to quantify. One study to attempt a quantification of monetary policy transparency is Eijffinger and Geraats , who rate nine major central banks based on the authors' assessment of their performance in relation to a range of communication criteria.

These include: clarity and precision about goals; the release of minutes and voting records from policy meetings; openness in relation to the data and models used to guide economic analysis; and forthrightness in ex-post examination of policy choices.


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Even leaving aside the unavoidable subjectivity of ratings on many of these criteria, a major issue with such an index concerns the arbitrariness of the combination of these different components into a single index, which Eijffinger and Geraats do using equal weights. A similar index of the transparency of 20 inflation-targeting central banks, again based on an equal weighting of separate ratings of various aspects of each bank's inflation report, has also been produced by Fracasso et al This approach is aimed at avoiding any subconscious contamination of the results by the authors' own knowledge of the operations and performance of each central bank.

Among a range of drawbacks identified by Lowe , however, is that such a group may be quite unrepresentative of the intended audience of central banks' reports. Finally, an alternative index of the transparency of the central banks of 87 countries, focused on the quality of their published forecasts, has been produced by Chortareas, Stasavage and Sterne Empirical applications of these indices have produced mixed results.

Cecchetti and Krause find evidence that central bank transparency improves a measure of macroeconomic performance based on the variability of inflation and output — although not as strongly as does central bank credibility quantified in terms of low past inflation outcomes. Demertzis and Hughes Hallett use the index of Eijffinger and Geraats to examine the impact of central bank transparency on economic outcomes, and interpret their results as suggesting that, for the nine OECD countries rated by Eijffinger and Geraats, increased transparency tends to reduce the variance of inflation but to increase the variance of output deviations from trend.

Finally, by contrast with Demertzis and Hughes Hallett, Chortareas et al find that greater transparency, as measured by their own index, is associated with a lower average level of inflation. What all of these studies have in common is that they seek to identify differences in economic performance across countries and to attribute them to the characteristics of the communication regime.

Performance, in this context, is usually measured in terms of either the volatilities of, or shifts in, key variables like inflation, output growth and interest rates. To put these studies in perspective, therefore, it is worth looking at the gross facts that need to be explained. Some summary statistics of these variables for a group of industrial countries are shown in Table 1.

Doubtless these trends are attributable to a number of factors that we cannot go into here, but which would have to include improved macroeconomic policies.