Derivation of Optimal Transparency of the Central Bank for Minimizing the Output Volatility: The Case Study of Organization of Islamic Cooperation

Mohammadali Ehsani (), Asadollah Farzinvash (), Nasser Elahi () and Reza Izadi ()
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Mohammadali Ehsani : Mazandaran University
Asadollah Farzinvash : University of Tehran
Nasser Elahi : Mofid University
Reza Izadi : Mofid University

Journal of Money and Economy, 2017, vol. 12, issue 3, 345-367

Abstract: This paper aims to optimize the Central Bank transparency level which corresponds to the minimum of output volatility in 28 states of the Organization of Islamic Cooperation (due to the maximum data availability) during the period 2003-2014. For this purpose, the Dincer-Eichengreen index is used, which includes five aspects covering political, economic, procedural, policy, and operational transparency. The index ranges in numerical value from 0 to 15 with 0 being the most opaque and 15 the most transparent. Applying the Arellano-Bond GMM estimation and using the Dincer-Eichengreen index as a proxy of transparency, the result indicates that an increase in the level of central bank transparency will decrease output volatility up to a certain point, after which additional information from central banks begin to exacerbate it. In addition, the effects of other variables (financial depth, first lag of inflation, oil rents-GDP ratio) on output volatility are positive. Therefore, moving with caution towards monetary policy transparency is recommended as output volatility is reduced considerably, implying significant benefits for output stability.

Keywords: Central Bank Transparency; Output Volatility; Optimal Transparency Level; Generalized Method of Moments (search for similar items in EconPapers)
JEL-codes: E0 E4 F0 (search for similar items in EconPapers)
Date: 2017
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