Sunday, June 3, 2012

Ben Bernanke’s Speech on Central Bank's Independence

As Nigerians continue the debate on the amendment of the Central Bank of Nigeria Act,  Ben Bernanke Chairman of the Federal Reserve System delivered a speech in 2010 defining the scope of  Central Bank independence.
Ben Bernanke, Chairman of the Board of the Federal Reserve System

See the link to the speech here

For those who may not have time to read the full speech, here is a brief on what he said about Central Bank’s independence.

Central Banks were largely able to deal with the financial crisis because they were able to make monetary policy decisions based on what is good for the economy in the longer run, independent of short-term political considerations.

Central bankers must be fully accountable to the public for their decisions, but both theory and experience strongly support the proposition that insulating monetary policy from short-term political pressures helps foster desirable macroeconomic outcomes and financial stability.

Transparency and accountability must go along with Central Bank independence

There exists a broad consensus among policymakers, academics, and other informed observers around the world that the goals of monetary policy should be established by the political authorities, but that the conduct of monetary policy in pursuit of those goals should be free from political control.

Political interference in monetary policy can generate undesirable boom-bust cycles that ultimately lead to both a less stable economy and higher inflation.

He emphasizes however that he is “by no means advocating unconditional independence for central banks. First, for its policy independence to be democratically legitimate, the central bank must be accountable to the public for its actions”

Then he states that “the independence afforded central banks for the making of monetary policy should not be presumed to extend without qualification to its nonmonetary functions”

He lists some of the nonmonetary functions to include, oversight functions over the banking system.

In the conduct of its regulatory and supervisory activities, the central bank should enjoy a degree of independence that is not greater and not less than that of other agencies engaged in the same activities; there should be no "spillover" from monetary policy independence to independence in other spheres of activity.

Bernanke lists the range of activities that covers Central Bank’s monetary policy decisions that requires independence to include “Conventional monetary policy, which involves setting targets for short-term interest rates or the growth rates of monetary aggregates,  the central bank's discount-window and lender-of-last-resort activities”  

These activities involve the provision of short-term, fully collateralized loans to the financial system as a means of meeting temporary liquidity needs, reducing market dysfunctions, or calming financial panics.

Democratic principles demand that, as an agent of the government, a central bank must be accountable in the pursuit of its mandated goals, responsive to the public and its elected representatives, and transparent in its policies.

He list the ways in which the Federal Reserve has maintained transparency and accountability to the US Congress and public to include;

Frequent speeches and testimonies before congress on the economic situation and on the prospects for policy, submission of extensive reports to Congress twice each year on the economy and monetary policy

Also the Monetary policy committee of the Federal Reserve publishes a statement after each of its meetings that explains the Committee's policy decision and reports the vote on that decision. The FOMC also publishes the minutes of each meeting just three weeks after the meeting occurs and provides, with a lag, full meeting transcripts. 

In addition, the FOMC has begun providing the public a quarterly summary of Committee participants' forecasts of key economic variables and, more recently, their assessments of the longer-run values to which these variables would be expected to converge over time. 


  1. I watched a documentary 97% Owned on I would say that this is first documentary highlighting this issue.

  2. I note the following points:-
    1. CBN is required to be transparent and accountable. Can we say that of the current CBN?
    2. Autonomy is in relation to monetary policy, and not non-monetary functions. Is our own CBN not a total government on its own, including building bridges and disaster relief?
    3. Bernanke says the goals of monetary policy should be established by political authorities, doesn't he? Is that the policy here?
    4. Is our CBN accountable to anyone? Is it accountable to the Nigerian public?
    5. hasn't the CBN on several occasions refused to be accountable to the elected parliament in contravention of these presriptions?

  3. @opeyemi/ I totally agree with the questions you have raised. I already did an earlier blog post asking "Is Sanusi Nigeria's most powerful man?" I think the current CBN act places too much power in the hands of the governor. I find the argument that appointing a board for the CBN will amount to political interference lame. The current management of the CBN including the governor are political appointees. So if the President can appoint a credible management, what stops it from appointing a credible board to act as a check on management. My next post is on the structure of some major central banks around the world. I am yet to see a central bank with the autonomy our CBN has in the developed world. Anyone who has, should please provide the link..