How Do Social Planners Design Accounting Standards? Evidence from Central Banks’ Accounting Choices

Abstract

The design of an optimal accounting regime for central banks involves a complex tradeoff. Transparent accounting can enhance central banks’ credibility and, thus, aid the pursuit of unconventional monetary policies. However, through its impact on income and equity, transparent accounting can misdirect attention towards short-term financial outcomes of these policies rather than long-term social welfare aims. We document that central banks’ accounting choices reflect these (perceived) social benefits and costs of accounting transparency. Specifically, central banks choose more transparent accounting regimes (e.g., IFRS, detailed disclosures, fair value measurement) when they face a greater demand for credibility in the pursuit of their policies. Conversely, central banks with less equity, less flexible distribution rules and greater concerns over their independence prefer less transparent accounting choices (e.g., discretionary “rainy day” provisions). Overall, we provide important insights into the design of optimal accounting rules from a social planner’s perspective.

Keywords: Central banks, IFRS, accounting choice, transparency, monetary policy

JEL Classification: M41, M48, E58