Central Bank Communication and Output Stabilization

Sylvester Eijffinger (), Marco Hoeberichts () and Mewael F. Tesfaselassie

No 4408, CEPR Discussion Papers from C.E.P.R. Discussion Papers

Abstract: Some central banks have a reputation for being secretive. A justification for this behaviour that we find in the literature is that being transparent about operations and beliefs hinders the central bank in achieving the best outcome. In other words, a central bank needs flexibility and therefore cannot be fully transparent. Using a forward-looking New-Keynesian model, we find exactly the opposite. A central bank that is conservative improves output stabilization by being transparent about the procedures it uses to assess the economy and, especially, about the forecast errors it makes. Under certain conditions transparency by a conservative central bank also improves interest rate stabilization. We also find that higher transparency makes it optimal for the central bank to be more conservative as the benefits from higher transparency in terms of output stabilization are greater the more conservative the central bank is.

Keywords: central bank; expectation formation; information processing; monetary policy (search for similar items in EconPapers)
JEL-codes: D83 E52 E58 (search for similar items in EconPapers)
Date: 2004-06
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Related works:
Working Paper: Central Bank Communication and Output Stabilization (2004)
Working Paper: Central Bank Communication and Output Stabilization (2004)
Working Paper: Central Bank Communication and Output Stabilization (2004)
Journal Article: Central bank communication and output stabilization (2009)
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