Optimal Central Bank Transparency

Sylvester Eijffinger (), Lex Hoogduin and Carin van der Cruijsen

No 6889, CEPR Discussion Papers from C.E.P.R. Discussion Papers

Abstract: 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.

Keywords: central bank transparency; inflation persistence; monetary policy (search for similar items in EconPapers)
JEL-codes: E31 E52 E58 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-cba, nep-mac and nep-mon
Date: 2008-06
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Working Paper: Optimal Central Bank Transparency (2008)
Working Paper: Optimal Central Bank Transparency (2008)
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