Central banks are under increasing scrutiny over their performance, their costs and the extent to which they employ modern management practices. Yet while performance management techniques are widespread in the commercial sector, it is difficult to apply these directly to central banks. This article begins by setting out what is involved in performance management and discusses some of the problems that occur in applying them to central banking. In a second section, some examples of best-practice activities in performance management are considered. It is hoped that this will open a debate about performance management - a debate to which all central banks are invited to contribute1.
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This means, however, that any assessment has to take account of sometimes muted or long-term outcomes, and external and often uncontrollable variables in various conversion processes. The assessment of credible and reliable policymaking and advice (a product, at output level) is also highly qualitative and socio-politically subjective. Nevertheless, other organisations facing similar issues include local government, judicial and education bodies, charities and consumer advice groups.
Modern central banks have to bridge and broker the public and private sectors, government and markets. This brings in further problems for performance assessment as multiple stakeholders with multiple and high expectations are involved. Thus, transparency may be one measure, but so is discretion (central banks cannot boast about banks in trouble that they are saving, nor always signal their market interventions in advance). Moreover, in seeking to convert activity to outcome, central banks have to balance tensions unique to their high-profile role(s). These range variously through exercising independence whilst maintaining close links to government (eg, in respect of fiscal policy); curbing inflation whilst avoiding high levels of unemployment (particularly regional); promoting the virtues of efficient and prudent processes (eg, payments, lending rules etc) whilst cherishing previously high levels of autonomy to manage their own internal affairs (sometimes in secretive or self-indulgent ways); and occupying a position of unique importance within each country whilst recognising accountability to the nation as a whole (eg, explaining interest rate decisions). On the other hand, commercial banks have to manage the tensions of making "ethical" or "fair" profits and providing a service, and oil companies have to take measures to protect the environment whilst drilling economically for their shareholders.
Performance measures conflict
A key problem in measuring performance arises as the more successful central banks are in their own terms, however, the less well they may appear to be doing in terms of standard management metrics. This issue can arise in respect of their work in several areas, which are set out below.
Curbing inflationary pressures. Lower interest rates cut into returns on central banks' own deposits and operational account balances, and call for more sophisticated investment strategies to improve returns.
Managing foreign exchange reserves for the long-term benefit of the nation as a whole. This approach is rather than managing them as one form of central bank income, with medium-term returns to government through tax.
Supervising markets and banks. This is an expensive and open-ended task.
Facilitating payments systems. These can encroach on the potential seignorage of any note issue.
Performing apparently less well in the eyes of some stakeholders can lead to increasing ministerial and public scrutiny, and pressure to reduce costs...