More recently, central bank independence has become a topical issue not only in Western Europe (in the context of the European Central Bank), but also in the transition countries of Central and Eastern Europe, where institution building, in particular in connection with financial sector reform, has emerged as a crucial element of the transformation process. The establishment of a two-tier banking system with an independent central bank whose main tasks are clearly specified is of critical importance for successful stabilization policies and constitutes, at the same time, an indispensable prerequisite for a functioning market economy.
This article surveys legal arrangements of central banks in the following ten Central and Eastern European transition countries: Bulgaria, the Czech Republic, Estonia, Hungary, Latvia, Lithuania, Poland, Romania, Slovakia and Slovenia.
Six of the countries under consideration have already concluded an Association Agreement with the European Union (i.e., Bulgaria, the Czech Republic, Hungary, Poland, Romania and Slovakia), the Baltic states and Slovenia are likely to follow in the course of 1995.
As every country examined in this article strives for eventual EU membership, the harmonization of legal standards, e.g. in the field of central banking, is important, particularly in the context of conforming to the Maastricht Treaty.
We focus on institutional issues of central banking and make a cross-country comparison of central bank legislation in the following areas: legislated prime objectives, statutory, political and policy independence (1) ), the status of central bank governors and the issue of lending to government.
Since the beginning of the political and economic opening-up of Central and Eastern Europe, much has been accomplished by the countries under consideration. Since 1989, all countries studied have adopted new central bank laws (2) ) - the timing being dependent on the countries´ particular political setting - the monobank-system has been broken up and financial markets have been developing.
Today it is generally accepted that safeguarding price stability is the key task of a central bank. Experience in a number of countries, e.g., Austria, supports the view that a high degree of central bank autonomy is helpful to achieve this target with low cost. It has been argued that central bank independence is important because government policy may have a shorter time horizon than monetary policy, e.g., due to electoral cycles, thereby provoking a policy dilemma(3).
In all but one central bank laws of the countries covered in this study price stability is legislated as the primary goal of monetary policy (see table in the annex). While most laws use the term "currency stability" rather loosely, two countries, namely Bulgaria and Hungary, have chosen the more precise definition of "internal and external currency stability", thus also referring to exchange rate policy (4). It has to be noted that the latter way to define the monetary policy objective is not uncontroversial (5). Insofar as it refers to nominal exchange rate developments, the fulfillment of the first (internal) goal depends on the anchor(s) chosen. If it applies to the real exchange rate, the price level is indeterminate and hence this interpretation of the prime objective might jeopardize monetary policy credibility. Moreover, in some of the examined countries the competence for establishing the exchange rate regime is assigned to the government, which might imply unclear responsibilities with respect to the achievement of the "external stability" goal of monetary policy. Finally, current Polish legislation requires the central bank to "strengthen the currency". Its meaning is very difficult to interpret, especially with regard to operational exchange rate policy.
While legal provisions granting central bank independence from government and parliament certainly are not enough by themselves to ensure stabilization-oriented monetary policy, it is also true that there are very few examples of central banks which have a high de-facto autonomy despite a relatively low degree of de-jure independence (e.g., Japan). Therefore, the importance of de-jure independence cannot be underestimated, especially in economies in transition.
Virtually all central bank laws examined (except the Romanian law) contain explicit provisions granting statutory independence to the central bank (see table in the annex). In most countries the wording refers to "independence from the government", while the Hungarian law provides for "independent implementation of monetary policy" (Art.6) and the Slovenian law contains the general provision that "The Bank shall be independent...."(Art.2). In all cases the central bank is free to decide on the use of policy instruments in day-to-day business.
At the same time, all central bank laws refer to the relationship between the central bank and the government. In general, the central bank has to support the economic policy of the government in one way or another (see table in the annex). In the cases of Estonia and Lithuania, however, this requirement is linked to the condition that the government´s economic policy not be in contradiction with the monetary policy objective of currency stability.
Some laws contain provisions on some form of cooperation - mostly rather loose - between the central bank and the government in the formulation of monetary policy. The Bulgarian law for instance requires that the National Bank and the Council of Ministers shall "inform each other" (Art.3). Most laws under consideration also contain an advisory function of the central bank to the government in the area of monetary policy and banking. This applies to the Czech (Art.9), Estonian (Art.4), Latvian (Art.6) Lithuanian (Art.8.5) and the Slovak (§ 13.2) central bank acts. The Hungarian central bank law goes further and defines an advisory function of the central bank with respect to economic policies in general (Art.42).
Whereas in Western countries the decision on the choice of the exchange rate regime is typically assigned to the government, the legislation of the examined countries shows a rather different picture.
While six of the central bank laws under consideration grant the competence for setting the exchange rate regime to the central bank (see table in the annex), Lithuania is the only country where responsibility of establishing the exchange rate regime clearly lies with the government. The central bank act only contains a stipulation that "the Bank of Lithuania shall control compliance (of monetary policy) with the exchange rate regime" (Art.8). The decision in April 1994 to change the Lithuanian exchange rate system to a currency board - following the Estonian model - was preceded by lengthy debates between the central bank and the government and was finally taken by the Lithuanian government against the advice of the central bank.
In three countries, namely Hungary, Poland and Slovenia, the legal provisions call in practice for coordinated policies between the central bank and the government. While in Hungary the exchange rate system is set by the government "in agreement with the National Bank of Hungary..." (Art.15), the Polish legislation assigns the final choice of the exchange rate regime to the Council of Ministers "on proposal of the Governor of the Polish National Bank, who has to coordinate his proposal with the Minister of Finance and the Minister for Economic Cooperation with Foreign Countries" (Art.39). The Slovenian law provides that the central bank may submit a draft law concerning the exchange rate regime to parliament (Art.3).
The legal status of central bank governors may have a major impact on the relationship between the central bank and the government.
In five of the examined countries the appointment of the governor is a responsibility of the state president (6). In the other countries the central bank governor is appointed by parliament (see table in the annex). The tenures of the governors, which range from 5 to 8 years, are in all countries longer than the electoral cycle.
As to the dismissal of central bank governors, in most cases they
can only be removed from office under the following circumstances
Among the institutional guarantees of central bank independence, legal constraints of government financing play an important role. In the countries under consideration, direct credit to the government is in general restricted to (essentially) overdrafts. Nevertheless, the fiscal financing restrictions are - in practice - definitely the weak spot in most of the examined countries. Experience has demonstrated that it is very difficult to protect the central bank from the growing pressure to increase direct financing to the government (via budget laws superseding central bank acts), especially if deteriorating budget positions and the absence of fully developed capital markets are taken into account. Eight of the ten countries surveyed in this article have - similarly to the quantitative financing restrictions contained in the Bundesbank Act and the Austrian National Bank Act - quite severe legal restrictions of lending to the government (8). It is only the Estonian central bank law which explicitly prohibits the Eesti Pank to "directly or indirectly grant credits to the government". In the Lithuanian central bank law no reference with respect to government financing can be found.
In general, the relevant provisions define a maximum amount of lending to the government usually related to a certain percentage of the planned or current budget revenues of the fiscal year (see table in the annex 1). The relevant Polish legislation contains rather contradictory provisions in this respect: While Art.34 of the Polish National Bank Act states that "...the BNP may buy in any given fiscal year debt securities issued by the Treasury to the total amount not exceeding 2 percent of planned expenditures of the state budget", the parliament has in practice - up to now - suspended this article. Therefore Art.14 enters into force according to which the limit of fiscal financing is subject to negotiation between the central bank governor and the Minister of Finance. The Slovenian central bank law also contains a different approach and limits the maximum amount of lending to the government to one fifth of the anticipated budget deficit.
The determination of maturity of these loans range from rather vague definitions such as "short-term" to clearly defined maximum durations varying between 3 months and one year.
From this brief survey of central bank legislation in ten selected
countries, the following main institutional features of guarantees
of central bank independence emerge:
Despite large differences one may, as a very preliminary assessment, conclude by saying that a number of the countries examined have been successful in reducing inflation and they come closer to their legislated prime objective. Independent central banks may have helped to advance on this path.
(*) Prepared for the ECU Journal No.32-July 1995. Parts draw heavily on Hochreiter (1995). The standard disclaimer applies.
(°) Oesterreichische Nationalbank, Foreign Research Division. Otto Wagner Platz 3. A - 1090 Wien.
(1) In the following, we distinguish three aspects of central bank independence: The term "statutory independence" refers to legal independence as stipulated in the relevant central bank act, "political independence" refers to the relationship between central bank and government and "policy independence" means central bank autonomy in the formulation of monetary policy.
(2) The new central bank act in Poland is still under consideration at the time of writing (May 1995). The act currently in force has been amended at least 15 times.
(3) See de Beaufort Wijnholds and Hoogdom (1994), p.82.
(4) For an interpretation in the case of Austria, see Hochreiter (1990).
(5) See Swinburne, M. and Castello-Branco, M. (1991), p.25.
(6) In order to avoid a confusion in terminology, the top representatives of the central bank (either "governors" or "presidents") are hereafter referred to as "governors" and presidents of state as "presidents".
(7) See Hochreiter (1995).
(8) See Hochreiter (1990).