Central bank transparency and shocks☆
Introduction
Following the widespread move toward more central bank (CB) transparency, there has been a large development of the theoretical literature on CB transparency. In this literature, “reduced form” models, where the underlying behavior of economic agents is not made explicit, have often been used. This may not be adequate if the equations of the model actually depend on the degree of transparency.
Here we will develop such a point in the case of the “expectations-augmented Phillips curve” model, where employment depends on inflation surprises. Such a model has often been considered in this literature. We will underline that the shock affecting this equation should depend on the degree of transparency on CB forecasts. As a consequence, some results obtained in the literature are biased against transparency. Thus, the literature has claimed that opacity is better than transparency on CB forecasts because transparency prevents the central bank from using inflation surprises to stabilize the economy.1 Here, by considering an underlying model which makes the behavior of the private sector more explicit, we show that transparency on CB forecasts reduces the magnitude of the shock in the Phillips curve. This effect is favorable to transparency and may dominate the negative effect underlined in the literature. This implies that transparency can be preferred to opacity.2
Section snippets
A reduced form analysis
We first consider the “reduced form model” of the expectations-augmented Phillips curve. It has been shown in the literature that more transparency on CB forecasts is harmful in such a model. As a useful benchmark we will briefly reproduce this analysis here. We have
We have α > 0 and A > 0. Eq. (1) indicates that employment n is an increasing function of inflation surprises, where π is the inflation rate and πe the inflation rate expected by the private sector. Expectations are
Analysis with an underlying model
The expectations-augmented Phillips curve (1) has often been justified by the existence of nominal wage rigidity through wage contracts. Here we will consider a model which makes explicit the underlying behavior of the private sector.5 As in Herrendorf and Lockwood (1997), there are a large number of trade unions and firms, with
References (7)
Transparency, reputation, and credibility under floating and pegged exchange rates
Journal of International Economics
(1999)Accountability, credibility, transparency, and stabilization policy in the Eurosystem
- et al.
A theory of ambiguity, credibility and inflation under discretion and asymmetric information
Econometrica
(1986)
Cited by (5)
Bayesian estimation of China's monetary policy transparency: A New Keynesian approach
2015, Economic ModellingCitation Excerpt :In the conventional expectations-augmented Phillips curve model, opacity is always preferred over transparency on central bank forecasts because transparency is expected to prevent the central bank from using inflation surprises to stabilize the economy (Cukierman, 2001; Geraats, 2006). However, in an extended framework where the private sector's behavior is modeled explicitly, Laskar (2010) has successfully shown that the result in favor of opacity found in the literature does not hold and transparency on central bank forecasts is preferred in that it reduces the shock affecting the Phillips curve. In recent years, most economists agree that transparency is crucial for the effective implementation of monetary policy since it allows the private sector to have better expectations and hence to make better-informed decisions (Blinder, 1998).
Does central bank transparency affect stock market volatility?
2014, Journal of International Financial Markets, Institutions and MoneyCitation Excerpt :On the one hand, Cukierman (2001), Geraats (2006) and Rhee and Turdaliev (2013), among others, argue that the opaque regime dominates the transparent regime. On the other hand, Laskar (2010), using an explicit way to model the private sector's behaviour, shows that the transparency regime prevails. Along the same line, Eijffinger et al. (2006) show that greater transparency should enhance central bank credibility, flexibility and reputation.
The unemployment effect of central bank transparency
2020, Empirical EconomicsOn the Limits of Transparency: The Role of Imperfect Central Bank Knowledge
2013, International FinanceStructural Reform and Transparency in a Monetary Union
2012, Open Economies Review
- ☆
This revised version has benefited from the helpful comments and suggestions made by an anonymous referee.