Central bank transparency under model uncertainty

Stefano Eusepi ()

No 199, Staff Reports from Federal Reserve Bank of New York

Abstract: This paper explores the effects of central bank transparency on the performance of optimal inflation targeting rules. I assume that both the central bank and the private sector face uncertainty about the "correct" model of the economy and have to learn. A transparent central bank can reduce one source of uncertainty for private agents by communicating its policy rule to the public. ; The paper shows that central bank transparency plays a crucial role in stabilizing the agents' learning process and expectations. By contrast, lack of transparency can lead to expectations-driven fluctuations that have destabilizing effects on the economy, even when the central bank has adopted optimal policies.

Keywords: Monetary policy; Inflation (Finance); Banks and banking, Central; Uncertainty (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-cba, nep-dge and nep-mon
Date: 2005
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