Transparency, the opacity bias, and optimal flexible inflation targeting (original) (raw)

In this paper, I revisit an old question in the analysis of mone- tary policy that was …rst studied by Rogo¤ (1985) -should central banks pursue objectives that dier systematically from social welfare? I investigate how the answer to this question is aected by the degree of transparency that characterizes monetary policy. When the policy regime is one of discretion and the central bank is opaque, changes in the policy instrument have informational eects that distort the cen- tral bank's incentives and generate policy biases. Directing the central bank to place more weight on in‡ation stabilization, i.e., to implement a less ‡exible in‡ation targeting policy, can oset this distortion and lead to lower social loss. In contrast, the objectives of a transparent central bank should coincide with those of society. However, outcomes under transparency may be dominated by those produced by an opaque and conservative (i.e., less ‡exible) central bank