Working Paper: CEPR ID: DP2671
Authors: Andrew J. Hughes Hallett; Nicola Viegi
Abstract: The literature has often commented on, but seldom explicitly analysed, the effects of a lack of transparency in monetary policy. Using a standard theoretical model where there are also opportunities for fiscal intervention, we argue that the effects of a lack of transparency will be very different depending on whether they reflect preference or goal uncertainties: that is, whether they represent a lack of political transparency or a lack of economic transparency. The former allows the Central Bank to create and exploit a 'strategic' reputation to its own advantage; the latter does not. The test that distinguishes the two cases is whether inflation forecasts are published or not. We also find that transparency is a partial, but strictly limited substitute for accountability.
Keywords: accountability; policy transparency; political uncertainty; reputation
JEL Codes: E52; E63; F42
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Lack of political transparency (D73) | Lower inflation expectations (E31) |
| Lower inflation expectations (E31) | Easier inflation control (E31) |
| Lack of political transparency (D73) | Easier inflation control (E31) |
| Central bank's reputation (E58) | Lower inflation expectations (E31) |
| Lack of economic transparency (H19) | No misrepresentation incentives (D82) |
| Lack of economic transparency (H19) | Private sector filters transparency effects (H23) |
| Transparency (G38) | Improved expectations (D84) |
| Transparency (G38) | Limited substitute for accountability (H83) |