Transparency: can central banks commit to truthful communication (original) (raw)

Central bank transparency and central bank communication: Editorial introduction

European Journal of Political Economy, 2007

Central banks now tend to attach greater importance to communication with the public than formerly was the case. Although the trend towards more transparency is justified by central bank accountability, it is less obvious that more central bank transparency is also beneficial from an economic point of view. It is also not clear what constitutes an optimal communication strategy. This introduction to the special issue on "Central bank transparency and central bank communication" reviews our current state of knowledge in this field and puts the contributions to this special issue in perspective.

The Role of Transparency in the Conduct of Monetary Policy

OECD Economics Department Working Papers, 2009

In contrast to the once prevailing norm of secrecy and opaqueness, transparency has now become one of the main features characterising the conduct of monetary policy. Detailed analysis of eleven OECD central banks shows that communication practices have converged markedly in the direction of ever greater transparency. Empirical evidence is consistent with the hypothesis that transparency contributes to the successful conduct of monetary policy: higher transparency is a typical element of monetary frameworks that are associated with better anchored inflation expectations and more stable inflation outcomes. Despite this general trend toward increased transparency, however, central banks differ in actual communication practices. There is a particular divergence with respect to transparency in the decision-making process and communication regarding future policy inclination. Although the appropriate degree of transparency in these areas is an unsettled issue, the fact that financial dislocation is impairing conventional monetary transmission makes these two areas critical for policy implementation. JEL codes: E31; E50; E52; E58. other members of the Economics Department. They are also indebted to Douglas Sutherland for his support on the random weighting technique. They would also like to thank Debra Bloch and Catherine Lemoine for statistical assistance and Susan Gascard, Veronica Humi and Anne Eggimann for secretarial assistance. Needless to say, any remaining errors fall under the responsibility of the authors.

Truthfulness of Central Bank Announcements

To evaluate the impact of central bank transparency, previous literature has assumed that the policymaker commits to truthful communication. However, by manipulating in ‡ation expectations economic volatility might be reduced. This paper analyses the truthfulness with which a central bank communicates in ‡ation targets or forecasts. It shows that, for a standard model, there is no rational expectations equilibrium with in ‡ation announcements when the policymaker has incentives to misrepresent private information. This problem is solved by announcing late in the period, when in ‡ation expectations are already formed but there is not yet information about future shocks. In this case, there are no incentives to mislead the public and in ‡ation announcements are still informative about the central bank's intentions for future periods. Therefore, an equilibrium does exist and truth-telling is optimal for the central bank and welfare-improving for society. Based on the implications of the model, empirical data is examined and no evidence is found against the truthfulness of annual in ‡ation targets.

Optimal central bank transparency

Journal of International Money and Finance, 2010

Should central banks increase their degree of transparency any further? We show that there is likely to be an optimal intermediate degree of central bank transparency. Up to this optimum more transparency is desirable: it improves the quality of private sector inflation forecasts. But beyond the optimum people might: (1) start to attach too much weight to the conditionality of their forecasts, and/or (2) get confused by the large and increasing amount of information they receive. This deteriorates the (perceived) quality of private sector inflation forecasts. Inflation then is set in a more backward looking manner resulting in higher inflation persistence. By using a panel data set on the transparency of 100 central banks we find empirical support for an optimal intermediate degree of transparency at which inflation persistence is minimized. Our results indicate that while there are central banks that would benefit from further transparency increases, some might already have reached the limit. JEL codes: E31, E52, E58 Keywords: central bank transparency, monetary policy, inflation persistence. * Views expressed are our own and do not necessarily reflect those of the institutions we are affiliated with. We would like to thank seminar participants at De Nederlandsche Bank, Alan Blinder, Marcel Fratzscher, Marco Hoeberichts, Joris Knoben and Ad Stokman for helpful comments and suggestions. † c.a.b.van.der.cruijsen@dnb.nl

Central Bank transparency in theory and practice

Journal of Macroeconomics, 2007

We study the e¤ects of Central Bank transparency on in ‡ation and the output gap. Our intention is to illustrate, through the help of a small analytical model, how an imperfectly transparent Central Bank, a¤ects the two main macroeconomic variables, in ‡ation and the output gap. The model tells us that transparency a¤ects the variability of in ‡ation and output but not their average levels. Then we examine the extent to which this conjecture is justi…ed by the recently devised index of transparency by Eij¢nger and Geraats. Given the limitations of such indices, we only examine the correlations between the index of transparency and the macro variables in question. This analysis shows that the average magnitudes are not a¤ected by transparency but their variability is. In the case of in ‡ation, its variability bene…ts from the reduction of transparency and about 50% is explained by the variability in the transparency index. The e¤ect on output volatility on the other hand is less clear, and in any case transparency seems to increase it rather than decrease it. J.E.

Central Banks' Transparency: Words as Signals

HISTORY OF ECONOMIC THOUGHT AND POLICY, 2014

Evidence of the evolution of ideas on central bank transparency can be found in the central bankers' speeches during the period 1997-2012. Exploratory analysis of the central bankers' speeches provides an overview of their use of language: speeches define the historical evolution of central banks' discourses, and thus suggest how the concept of transparency has evolved. The paper invites reconsideration of the role of central banks' transparency through analysis of central bankers' speeches and their use of language as a part of their communication framework. While literature on transparency indexes shows increasing central bank transparency, the semantic area of transparency in central bankers' speeches changed over the period 1997-2012. The paper investigates this evolution until recent shift towards new semantic areas pertaining more to the financial and real economy than to traditional inflation concerns.

Uncertainty and Transparency of Monetary Policy

Financial Institutions and Markets, 2010

What is the proper degree of central bank transparency? This paper investigates the issue in a framework characterized by: a) common uncertainty on potential output, and b) imperfect knowledge of the central bank target (and inference of the true policy reaction function) by the private sector. We show that full transparency is socially beneficial under a variety of parametrizations. Our results confirm, in a different set up, those of Faust and Svensson (

Three different approaches to transparency in monetary policy

Economia Politica, 2015

We present three different views of imperfect transparency in monetary policy: political transparency, economic transparency and constructive ambiguity. The first two show that transparency reduces the variability of inflation and the output gap but does not affect their average levels. But if the Central Bank is unable to commit to one particular set of preferences for all circumstances, then in line with the hypothesis of constructive ambiguity we find that both the levels and the variability of output and inflation will be affected-which means that this form of imperfect transparency could be used strategically. An empirical examination of these results, based on an index constructed by Eijffinger and Geraats, shows that macroeconomic averages are not much affected by transparency. But transparency appears to reduce the variability of inflation while increasing the variability of output. That suggests that Central Banks may in fact exploit constructive ambiguity when they try to be transparent. Keywords Ambiguity Á Imperfect transparency Á Independent monetary policies JEL Classification E52 Á E58 Views expressed are our own and do not necessarily reflect those of the institutions we are affiliated with.

The Optimal Transparency of Monetary Policy

International Journal of Academic Research in Economics and Management Sciences, 2017

In this study, optimal transparency is examined in terms of monetary policy. Since about the last two decades, more emphasis has been placed on implementations of the monetary policy transparency for the success of the inflation targeting regime adopted by many countries. It is considered that transparency will be beneficial, such as the ability of central banks to make better predictions of economic units and to increase the credibility and persuasion power of the central bank. It is assumed that practices in this context will produce better results for the effectiveness of the monetary policy, but there is not always an expected outcome for an increase in the level of transparency. With this study, the negative effects of high transparency are put forth and what the optimal level of transparency should be is dealt with. In addition, the development of the central bank of the republic of Turkey in the context of transparency is stated.

Three models of imperfect transparency in monetary policy

Three Models of Imperfect Transparency in Monetary Policy* We present three different models of imperfect transparency in monetary policy: political transparency, economic transparency and constructive ambiguity. The first two show that transparency reduces the variability of inflation and the output gap but does not affect their average levels. But if the Central Bank is unable to commit to one particular set of preferences for all circumstances, in line with the hypothesis of constructive ambiguity, we find that both the levels and the variability of output and inflation may be affected. An empirical examination of these predictions, based on an index recently constructed by Eijffinger and Geraats, shows that macroeconomic averages are not much affected by transparency. But transparency appears to reduce the variability of inflation while increasing the variability of output. That suggests that Central Banks may have been exploiting constructive ambiguity more than a lack of transparency. JEL Classification: E52 and E58