Why the Bundesbank was more transparent than the ECB

 

The Dutch central bank held an interesting workshop on central bank transparency on Thursday at which  I made the point that the Bundesbank was more transparent than either the ECB or the Fed. It is a view that needs some explaining.

Transparency is one of the most misused concepts in the present discussion about central banks. The ECB believes it is transparent because it holds regular press conferences, and because it publishes detailed monthly reports in which it analyses the present economic situation in detail.

Four times a year, the ECB publishes its own forecasts for growth and inflation. For some time now, ECB President Jean-Claude Trichet has pre-announced interest rate decisions ahead of time.  If you define transparency in this way, then yes, the ECB must be one of the world's most transparent central banks.

But I find this is a bad definition of transparency. Neither the press conferences nor the reports are particularly illuminating. The forecasts certainly are not. And if you pre-announce an interest rate change, then you must have made the decision at a previous meeting. Pre-announcing merely shifts the time horizon from t to t+1. But if you were not transparent before, than you are not transparent now.

Transparency is not about the communication of policy, but about policy itself. The Bundesbank used to follow a unitary framework of monetary targeting. On top of this, it used a fair amount of discretion. The Bank of England and many other central banks use a framework of inflation targeting
- also with some discretion. The ECB, by contrast, uses a hybrid two-pillar strategy, and this is at the heart of its lack of transparency. You never know on which pillar they currently sit. Until about a year ago, we thought the monetary pillar had de facto collapsed. Then, over the last 12 months, the ECB appeared to place a stronger emphasis on this pillar. But more recently, Trichet appeared to play down the significance of the latest monetary data. The ECB  jumps between two different world views - the real and the monetary - and it is never clear which they one they favour at any particular time.

With the Bundesbank we used to question whether and to which extent they would stick to their intermediate monetary target. It is true that the Bundesbank occasionally sprang a surprise on observers. But it was by and large more consistent and transparent than the ECB - and ultimately more credible.

I am not saying the ECB should give up on monetary analysis. But unless they find a way to integrate the two pillars, the ECB is not as transparent as it could be.

---