The Costs of Increasing Transparency

Maria Demertzis and Marco Hoeberichts ()

DNB Working Papers from Netherlands Central Bank, Research Department

Abstract: In their seminal paper, Morris and Shin (2002a) argued that increasing the precision of public information is not always bene.cial to social welfare. Svensson (2005) however has disputed this by saying that although feasible, the conditions for which this was true, were not at all that likely. In that respect, therefore, increasing transparency remains most of the times beneficial to social welfare. In this paper, we extend the Morris and Shin attempt, by setting it up as an explicit interactive game between the Central Bank, the objectives of which we model explicitly, and the private sector. We show that in the absence of costs, both players benefit from transparency, in the manner described previously in the literature, and point the di¤erences in their gains. Following that, we then introduce the fact that increasing transparency comes at some costs, and show how both players face incentives to free ride on each other as a result. The presence of costs, thus alters the way in which greater transparency is attained.

Keywords: Public and Private Signals; High Order Expectations; 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-mac and nep-mon
Date: 2006-01
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Persistent link: http://EconPapers.repec.org/RePEc:dnb:dnbwpp:080

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