Working Paper: CEPR ID: DP2689
Authors: Henrik Jensen
Abstract: According to most academics and policymakers, transparency in monetary policymaking is desirable. I examine this proposition in a small theoretical model emphasizing forward-looking private sector behaviour. Transparency makes it easier for price setters to infer the central bank's future policy intentions, thereby making current inflation more responsive to policy actions. This induces the central bank to pay more attention to inflation rather than output gap stabilization. Then, transparency may be disadvantageous. It may actually be a policy-distorting straitjacket if the central bank enjoys low-inflation credibility, and there is need for active monetary stabilization policy.
Keywords: central bank; institutions; monetary policy; transparency
JEL Codes: E42; E52
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| transparency (G38) | responsiveness of inflation (E31) |
| transparency (G38) | central bank's focus on inflation stabilization (E63) |
| responsiveness of inflation (E31) | policy distortion (H31) |
| transparency (G38) | policy flexibility (J68) |
| transparency (G38) | credibility gains (Z13) |