To achieve price stability and sustainable economic growth, an economy must have a central bank that is accountable, yet independent. Accountability means being answerable for one's decisions. What is implicit in accountability is the idea that a failure to live up to one's responsibilities will result in some form of disciplinary action.

This raises a question: to whom is the central bank accountable - the government or the people via the legislature? Ultimately, a central bank should be accountable to the public, but since the public has no control over the central bank, it is then the obligation of the government or elected representatives of the people to hold the central bank accountable. Making a central bank accountable in this way involves, by definition, some compromise of its independence.

Proper accountability and independence requires that central banks have clear and measurable primary objectives, well-designed systems of checks and balances, considerable transparency and timely disclosure and an appropriate level of reporting obligations to the legislature.

Central banks should have a single objective or at least a clearly defined primary objective that guides its monetary policy. The central bank should then be held accountable for the outcomes of its policies based on this objective. From another perspective, having multiple objectives reduces a central bank's effectiveness, dilutes accountability and complicates the coordination of economic policies with the government.

The primary objective of a central bank should be to achieve and maintain domestic price stability. Recent history has shown that price stability is the best contribution monetary policy can make to sustainable economic growth. Central banks that pursue more than one objective at a time tend to weaken the credibility of monetary policy by eroding clarity and transparency.

For instance, the goal of the European Central Bank is price stability. In the US, the Federal Reserve has three interrelated policy goals: "maximum employment, stable prices and moderate long-term interest rates".

Accountability can be further enhanced by a good system of checks and balances overseen by one or more supervisory boards. There are several types of supervisory boards, including ones that: make policy decisions, including determining target inflation and interest rates; advise the decision-makers of the central bank; decide on policy execution; implement decisions; and monitor policy performance, the financial condition of the central bank and the use of bank resources.

Some countries have only one board, with the governor responsible for day-to-day operations. Other countries have several boards, such as a policy board, a supervisory board and an audit committee, with the governor, or a general manager, serving as CEO. The composition of any board should reflect its function. Boards with oversight responsibilities should have independent, external members, ideally the majority.

Accountability also applies to the governor of the central bank, who generally should have a term of four to six years with the option of reappointment, dependent upon satisfactory performance. Greater accountability can be achieved through the reappointment process, and committee members can more easily be held accountable for their policy votes. In the US, the terms of the chairman and vice chairman of the Board of Governors are only four years each, although both may be reappointed if they remain on the board. Short, renewable terms reduce independence but facilitate accountability.

It is important to reiterate that central banks must be independent and free from political influence. This balance of accountability and independence can be achieved with a strong system of checks and balances via the legislature and supervisory boards.

The author is director of the Financial Policy Section of the Fiscal Policy Office at the Finance Ministry. He can be reached at chodechai@fpo.go.th.

Chodechai Suwanaporn