The Optimal Transparency of Monetary Policy (original) (raw)

Optimal Transparency of Monetary Policy

The Optimal Transparency of Monetary Policy, 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.

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.

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.

Transparency and Monetary Policy Effectiveness

Annals of Economics and Statistics, 2011

This article analyses the effects of economic transparency on the optimal monetary policy in an economy affected by demand shocks. In an environment of imperfect common knowledge, demand shocks create a trade-off between stabilising the price level and stabilising the output gap. The monetary policy implemented by the central bank tends, on the one hand, to offset demand shocks but, on the other hand, to distort the economy because of its mistaken view of the fundamental state of the economy. Transparency is optimal as long as the central bank does not weight the stabilisation of the output gap too heavily in its objective function.

Central Bank Transparency: A Market Indicator

It is widely believed that monetary policy outcomes are generally enhanced if the conduct of policy by the central bank is widely understood by other agents in the economy. This widespread belief has given rise to a number of attempts to measure the ‘transparency’ of monetary policy in various regimes. Unsurprisingly, the degree of transparency depends upon a variety of institutional arrangements peculiar to each monetary regime. Thus, the dominant approach to measurement relies upon identifying a range of legal and other formal characteristics - in a manner very reminiscent of the central bank independence literature of fifteen years ago. This approach is not entirely satisfactory, however, since it is agents’ perceptions of the degree of transparency that matters if transparency is to have any effect on policy outcomes. This has given rise to other methods of measurement which survey the views of agents. While this is potentially more relevant, it is obviously possible that their ...

The Advantage of Transparent Instruments of Monetary Policy

2001

A classic question in international economics is whether it is better to use the exchange rate or the money growth rate as the instrument of monetary policy. A common argument is that the exchange rate has a natural advantage since exchange rates provide signals of policymakers' actions that are easier to monitor than those provided by money growth rates. We formalize this argument in a simple model in which the government chooses which instrument it will use to target inflation. In it, the exchange rate is more transparent than the money growth rate in that the exchange rate is easier for the public to monitor. We find that the greater transparency of the exchange rate regime makes it easier to provide the central bank with incentives to pursue good policies and hence gives this regime a natural advantage over the money regime.

Monetary Policy Transparency in the Inflation Targeting

2005

This paper quantifies transparency of monetary policy in the three EU New Member States that have adopted direct inflation targeting strategy. Two measures of transparency are applied. The institutional measure reflects the extent to which a central bank discloses information that is related to the policymaking process. The behavioural measure reflects the clarity among the financial market participants about the

The Advantage of Transparency in Monetary Policy Instruments

2006

Monetary policy instruments differ in tightness-how closely they are linked to inflation-and transparency-how easily they can be monitored. Tightness is always desirable in a monetary policy instrument; when is transparency? When a government cannot commit to follow a given policy. We apply this argument to a classic question: Is the exchange rate or the money growth rate the better monetary policy instrument? We show that if the instruments are equally tight and a government cannot commit to a policy, then the exchange rate's greater transparency gives it an advantage as a monetary policy instrument.

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.