Procedural transparency in Latin American central banks under inflation targeting schemes. A text analysis of the minutes of the Boards of Directors

Ensayos sobre Política Económica 33 (2015) 76–92 Ensayos sobre POLÍTICA ECONÓMICA www.elsevier.es/espe Procedural transparency in Latin American central banks under inflation targeting schemes. A text analysis of the minutes of the Boards of Directors夽 Rodrigo Taborda Universidad de los Andes, Facultad de Administración, Calle 21 # 1 – 20, Bogotá, Colombia a r t i c l e i n f o Article history: Received 30 June 2014 Accepted 5 January 2015 Available online 3 March 2015 JEL classifications: E58 C49 O54 a b s t r a c t The disclosure of the minutes of the Boards of Directors of central banks (procedural transparency within the inflation targeting (IT) literature) implies the challenge of sending a clear message. Regardless of whether the document released is a brief, moderate, or highly detailed (verbatim) account of a Board’s discussion, its contents often align expectations and define an effective monetary policy to curb inflation. This paper provides a quantitative perspective of procedural transparency by performing a text analysis of the minutes of Board meetings in the central banks of Brazil, Chile, Colombia, Mexico, and Peru. The study examined the lengths of the minutes, their frequent vocabulary (including its association with a predefined central-bank terminology), and their readability (through a reading ease index). © 2014 Banco de la República de Colombia. Published by Elsevier España, S.L.U. All rights reserved. Keywords: Central bank minutes Brazil Chile Colombia Mexico Peru Text analysis Cluster analysis Readability measures Transparencia procedimental en Bancos Centrales de América Latina bajo el esquema de inflación objetivo. Análisis textual de las actas de las Juntas Directivas r e s u m e n Códigos JEL: E58 C49 O54 Palabras clave: Actas del Banco Central Brasil La divulgación de las actas de las juntas directivas de los bancos centrales (transparencia procedimental dentro de la literatura de inflación objetivo) supone el reto de enviar un mensaje claro. Independientemente de si el documento publicado es un resumen breve, moderado o muy detallado (literal) de una reunión de la junta, los contenidos suelen converger las expectativas y definir una política económica eficaz para contener la inflación. El presente ensayo arroja una perspectiva cuantitativa de la transparencia en los procedimientos por medio de un análisis textual de las actas de las reuniones 夽 I would like to express my gratitude to Volker Nitsch, Hernán Rincón, and the participants of the 11th Annual Conference for the Special Edition of the ESPE Journal “Changes in monetary policy and central Banking over the past two decades” and particularly, to the invited editor Julian Parra, and the two anonymous referees for their helpful comments to the previous version of this document. My gratefulness goes also to Eduardo Soto for his valuable research assistance, and to María Angélica Samper C. (www.transcrear.com) for her English proofreading and editing services. Last, I would like to acknowledge and appreciate the support of Universidad de Los Andes and its Facultad de Administración for the development of this study under the “Proyecto de Profesores Asistentes (FAPA)”. E-mail address: http://dx.doi.org/10.1016/j.espe.2015.01.002 0120-4483/© 2014 Banco de la República de Colombia. Published by Elsevier España, S.L.U. All rights reserved. R. Taborda / Ensayos sobre Política Económica 33 (2015) 76–92 Chile Colombia México Perú Análisis textual Análisis por grupos Medidas para la legibilidad 77 de las juntas en los bancos centrales de Brasil, Chile, Colombia, México y Perú. El estudio examinó la longitud de las actas, el vocabulario más frecuente (entre el que se incluye la asociación a una terminología predefinida del banco central) y su comprensión (a través de un índice de legibiligad). © 2014 Banco de la República de Colombia. Publicado por Elsevier España, S.L.U. Todos los derechos reservados. 1. Introduction In the 1990s, the central banks of several developing countries carried out deep reforms to control inflation (Mishkin & Savastano, 2000). Most of them were within the IT scheme. While there is no conclusive empirical evidence of the IT scheme’s causal effect upon inflation, it is regarded as a chief strategy to reduce inflation and bring about price stability in many economies (IMF, 2005; Lin & Ye, 2009; Mishkin & Schmidt-Hebbel, 2007).1 Mishkin (2000) describes five basic elements for a successful IT strategy: (1) a public announcement of the inflation target, (2) an institutional commitment to price stability, (3) increased amount of information to guide policy decisions, (4) transparency through communication with the public, and (5) accountability. While the public announcement of an inflation target, the institutional arrangements (including constitutional or those related to the banks’ independence), and accountability received great attention and academic scrutiny in the early stages of the IT scheme implementation,2 the policy and research agendas have been focusing on increased information and transparency in more recent times.3 In general, the compliance with information and transparency requirements has been assessed by the number of background studies, reports to the media, Senate hearings, minute releases, and other printed materials employed in the policy decision-making and dissemination processes. Such evidence has been used to determine to what extent central banks are complying or not with an IT approach. Beyond the above-described framework, Geraats (2002) breaks down the concept of central-bank transparency into five facets: (1) political, (2) economic, (3) procedural, (4) policy, and (5) operational transparency. This author shows how transparency influences and integrates all IT elements, further inquiring whether these elements reduce uncertainty or not, and affect the incentives for reputation building. From this perspective, procedural transparency deals with how monetary policy decisions are taken, including policy deliberations crystallized in minutes and voting records. This paper focuses on procedural transparency by examining the release of the minutes of central-bank Board meetings. This is not, by any means, a trivial task. It implies a commitment to an effective public communication, so that the citizens’ expectations are aligned, and the anti-inflationary policies may succeed. However, the contents of the minutes often remain unchecked with respect to their conveying the desired message. In other words, beyond the publishing of the minutes, little is said about what is in them. Therefore, there is a possible imbalance between the freedom of information (procedural transparency) and the contents of these communications (clarity). This paper examines such a potential 1 Broto (2008) examines the volatility effects of IT in Latin America. Steiner, Barajas, Pabón, and Villar (2014) review the IT and inflation-control experience within the region. 2 The va (...truncated)