Therefore, as you celebrate this great milestone, we join you in anticipating further progress and effectiveness in the execution of your mandate. Mr. Chairman, the central theme of my address today is the important role that information plays in economics in general and in financial markets in particular. In 1970, some 39 years ago, or 4 years before the establishment of the Central Bank of Swaziland, an economist called George Akerlof published a paper called “The Market for Lemons.” By lemons he was referring to used cars in the United States of America. Akerlof, who would later win the Nobel Prize in Economics for his work, demonstrated how information asymmetries between two contracting parties, a used car seller and a used car buyer, could lead to an inability of the car dealer to sell cars. More broadly, the moral of his story was that information asymmetries that allowed for no credible assessment of value of a given transaction, could lead to market collapse – in this instance the market for used cars. Mr. Chairman, if we fast forward to the year 2008, and to the current financial crisis, we note that asymmetries in information between financial institutions, this time relating to the extent of exposure to and value of complex derivative products, led to a freezing up of credit markets, the eventual collapse of some important financial institutions, and the near meltdown of the entire financial system. In these events we can see the insights of Akerlof in his 1970 paper.
Furthermore, given the complexity of formulating monetary policy and getting accurate projections, the role of the media and other financial commentators is not devoid of risk to the central bank’s credibility particularly, in challenging economic times. It is therefore, important for central banks to ensure that where projections on the future path of key macroeconomic variables are provided, these have to be set out in conditional forms and linked to incoming information with an assessment of the balance of risks. Mr. Chairman, turning to the role of the legislature, it is important to note that legislative oversight of monetary policy has a long history in many countries. In this respect, the USA provides a good case in point of a country with strong legislative oversight over the central bank’s operation. Congressional oversight of the Federal Reserve goes back to the founding of the central bank in 1913. However, the nature and purpose of oversight has changed overtime. Since 1978, the Federal Reserve has been subject to biannual oversight hearings before the Senate and House banking committees. Several other countries have similar arrangements where the central bank periodically appears before a committee of parliament. Parliament in New Zealand also has a role in monitoring the Bank's conduct of policy. By statute, each Monetary Policy Statement is referred to Parliament's Finance and Expenditure Committee. That Committee, with the assistance of its own professional adviser, can choose to extensively scrutinise the extent to which policy was, and has been, conducted consistent with the Policy Targets Agreement.