Basic Principles of Good Central Bank Governance: Implications for the Conduct Monetary Policy

Abstract

This article shows that among the basic principles of central banks governance for the conduct of monetary policy are the independence, transparency, and accountability. In this sense, a macroeconomic model is constructed through a monetary policy game with asymmetric information and based on elements of Barro and Gordon (1983), Lohmann (1992), Nolan and Schaling (1998), and Eijffinger, Hoeberichts and Schaling (1998) and making use of Montecarlo simulations, is denoted among some of its findings that: a) the type of preferences of the central bank and the government relating to the managing of the macroeconomics affect the independence of the central bank, and in turn his credibility and policy objectives, showing that when the preferences of the government and / or the central bank are more populist it diminishes the independence, b) the level of transparency of the central bank affects the conduct of monetary policy (as well as its anchor), as well as transparency (accountability), expected inflation will be greater, and c) there are situations that may alter an economic policy objective, where optimal coordination between the government and the central bank is appropriate. Finally, a descriptive analysis of data shows that the basic principles of central banks good governance are key to economies that transit or apply inflation targeting schemes.