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A clear advantage: The benefits of transparency to crisis recovery

George E. Shambaugh and Elaine B. Shen

European Journal of Political Economy, 2018, vol. 55, issue C, 391-416

Abstract: Increasing transparency is one of the first and most common recommendations from international financial institutions to policymakers in countries that experience economic crises. Despite the widespread prescription of this elixir, disagreements persist about its efficacy during crises. Much of the existing literature suggests that increasing transparency decreases information asymmetries, increases policy predictability and the credibility of policy commitments, improves the effectiveness of monetary policy, and bolsters public confidence. Each of these effects could plausibly shorten the duration of economic crises. Critics counter, however, that effects of transparency are ambiguous and may increase policy uncertainty, raise volatility, increase the prospect of collectively self-destructive behaviors, and decrease the effectiveness of monetary policy – effects that could prolong crises. These debates persist in part because related empirical research tends to focus primarily on the transparency of central banks and its impact on market expectations regarding short-term interest rates without considering the transparency of national governments and how the availability of credible data about the national economy from sources other than the central bank affects public and market expectations. We argue that greater transparency of national governments – often inferred from, yet independent of, the transparency of central banks – will decrease the duration of inflation and currency crises by providing information about existing economic conditions, increasing the predictability and credibility of national economic policy, and increasing confidence in the efficacy of policy choices by demonstrating the degree to which the policy positions of national politicians and central bankers align. We operationalize government transparency in terms of the government dissemination of credible macroeconomic information using the Hollyer, Rosendorff, and Vreeland (HRV) index. Our analyses of 125 countries from 1980 through 2010 indicate that higher levels of government transparency are strongly correlated with shorter durations of inflation and currency crises and that the level of transparency is negatively correlated with the severity or size of inflation crises.

Keywords: Transparency; Political transparency; Government transparency; Central bank transparency; Economic crisis; Inflation crisis; Currency crisis; Monetary policy; Duration (search for similar items in EconPapers)
JEL-codes: E58 E52 (search for similar items in EconPapers)
Date: 2018
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DOI: 10.1016/j.ejpoleco.2018.03.002

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