Working Paper: CEPR ID: DP2582
Authors: Petra M. Geraats
Abstract: Recently, several central banks have abandoned the usual secrecy in monetary policy and become very transparent. This paper provides an explanation for this puzzling fact, focusing on the disclosure of central bank forecasts. It shows that transparency reduces the inflationary bias and gives the central bank greater flexibility to respond to shocks in the economy. Furthermore, it makes it easier for a central bank to build a reputation. To achieve these benefits of transparency it is generally necessary to publish the conditional central bank forecasts for both inflation and output.
Keywords: Monetary Policy; Transparency
JEL Codes: E52; E58
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Transparency (G38) | Central Bank's Reputation (E58) |
| Transparency (G38) | Inflation Bias (E31) |
| Transparency (G38) | Public Understanding of Central Bank Intentions (E52) |
| Public Understanding of Central Bank Intentions (E52) | Inflation Expectations (E31) |
| Inflation Expectations (E31) | Central Bank's Ability to Stabilize the Economy (E52) |
| Transparency (G38) | Flexibility in Responding to Economic Shocks (F41) |
| Lack of Transparency (D82) | Inflation Expectations (E31) |
| Lack of Transparency (D82) | Effectiveness of Monetary Policy (E52) |
| Transparency (G38) | Interest Rate Adjustments (E43) |
| Weak Central Banks (E58) | Preference for Opaqueness (D81) |
| Preference for Opaqueness (D81) | Reputation Damage (K24) |
| Reputation Damage (K24) | Inflation Expectations (E31) |
| Transparency (G38) | Economic Outcomes (P47) |