Political Pressures and Monetary Mystique

Central bank independence and transparency have become best practice in monetary policy. This paper cautions that transparency about economic information may not be beneficial in the absence of central bank independence. The reason is that it reduces monetary uncertainty, which could make the government less inhibited to interfere with monetary policy. In fact, a central bank could use monetary mystique to obtain greater insulation from political pressures, even if the government faces no direct cost of overriding. As a result, economic secrecy could be beneficial and provide the central bank greater political independence

Transparency of Monetary Policy: Theory and Practice

Transparency has become one of the main features of monetary policymaking during the last decade. This paper establishes some stylized facts. In addition, it provides a systematic overview of the practice of monetary policy transparency around the world. It shows much diversity in information disclosure, even for central banks with the same monetary policy framework, including inflation targeting. Nevertheless, the paper finds significant differences in transparency across monetary policy frameworks. The empirical findings are explained using key insights distilled from the theoretical literature. Thus, this paper aims to bridge the gap between the theory and practice of monetary policy transparency

Why adopt transparency? The publication of central bank forecasts

Recently, several central banks have abandoned the usual secrecy in monetary policy and become very transparent. This paper provides an explanation for this puzzling fact, focussing on the disclosure of central bank forecasts. It shows that transparency reduces the inflationary bias and gives the central bank greater flexibility to respond to shocks in the economy. Furthermore, it makes it easier for a central bank to build reputation. To achieve these benefits of transparency it is generally necessary to publish the conditional central bank forecasts for both inflation and output. JEL Classification: E52, E58

ECB Credibility and Transparency

This paper argues that ECB credibility in delivering price stability is being progressively eroded; this problem could be overcome by embracing greater transparency especially about the ECB's objectives, macroeconomic forecasts and decision-making. During the ECB's first decade, average inflation in the euro area has been low, but it has failed to meet the ECB's criterion of below but close to 2% over the medium term. Although this could be attributed to unanticipated shocks, the analysis in this paper points to some structural shortcomings. In particular, there has been an upward trend in medium and long term inflation expectations in the euro area, which have even reached over 2%, and the credibility of the ECB achieving price stability in the medium term has gradually eroded to critically low levels. In addition, there is evidence that medium and long term inflation expectations are negatively affected by the inflation experience of the euro area. However, this paper argues that these problems could be overcome embracing by greater transparency, especially about the ECB's objectives, macroeconomic forecasts and decision-making.ECB, monetary policy, inflation expectations, Geraats

Intertemporal Substitution and Hyperbolic Discounting

Evidence from behavioural experiments suggests that intertemporal preferences reflect a hyperbolic discount function. This paper shows that in contrast to exponential discounting, the elasticity of intertemporal substitution for hyperbolic consumers depends on the persistence of the change in the intertemporal relative price. In particular, lasting changes in the real interest rate are likely to generate a smaller degree of intertemporal substitution in consumption than temporary changes. This result holds for both sophisticated and naive hyperbolic consumers. It provides a novel testable implication of hyperbolic discounting and a new perspective on intertemporal substitution

How Transparent Are Central Banks?

Central bank transparency has become the topic of a lively public and academic debate on monetary policy. Unfortunately, it has been complicated by the fact that transparency is a qualitative concept that is hard to measure. This paper proposes a comprehensive index for central bank transparency that comprises the political, economic, procedural, policy and operational aspects of central banking. The index is compiled for nine major central banks. It is based on a detailed analysis of actual information disclosure and reveals a rich variety in the degree and dynamics of central bank transparency

Transparency and Reputation: The Publication of Central Bank Forecasts

Transparency has become one of the key features of monetary policy. This paper analyzes the reputational incentives related to transparency, focusing on the publication of central bank forecasts. A simple dynamic monetary policy game shows how transparency reduces inflation, as has been found empirically. Although transparency exposes weak central banks, the negative market feedback in response to secrecy could provide a sufficiently strong inducement to become transparent. Thus, reputational concerns could lead to transparency, even without formal disclosure requirements

Inflation and Its Variation: An Alternative Explanation

This paper introduces a general objective function for monetary policy that abandons certainty equivalence and features 'prudence'. It provides an alternative explanation for the positive relation between the level and variability of inflation, both across countries and over time. In particular, the model predicts that high (low) inflation tends to be more variable (stable) over time.

How transparent are central banks?

Central bank transparency has become the topic of a lively public and academic debate on monetary policy. However, this has been complicated by the fact that transparency is a qualitative concept that is hard to measure. This paper proposes an index for the transparency of monetary policy that comprises the political, economic, procedural, policy and operational aspects of central banking. The index is compiled for nine major central banks. It is based on a detailed analysis of actual information disclosure and reveals a rich variety in the degree and dynamics of central bank transparency