Working Paper: CEPR ID: DP4117
Authors: Maria Demertzis; Andrew Hughes Hallett
Abstract: We present three different models of imperfect transparency in monetary policy: political transparency, economic transparency and constructive ambiguity. The first two show that transparency reduces the variability of inflation and the output gap but does not affect their average levels. But if the Central Bank is unable to commit to one particular set of preferences for all circumstances, in line with the hypothesis of constructive ambiguity, we find that both the levels and the variability of output and inflation may be affected. An empirical examination of these predictions, based on an index recently constructed by Eijffinger and Geraats, shows that macroeconomic averages are not much affected by transparency. But transparency appears to reduce the variability of inflation while increasing the variability of output. That suggests that Central Banks may have been exploiting constructive ambiguity more than a lack of transparency.
Keywords: ambiguity; imperfect transparency; independent monetary policies; rational inattention
JEL Codes: E52; E58
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| political transparency (D73) | lower variability of inflation (E31) |
| political transparency (D73) | lower variability of output (C29) |
| economic transparency (G38) | lower variability of inflation (E31) |
| economic transparency (G38) | lower variability of output (C29) |
| lack of transparency (D82) | higher variability of inflation (E31) |
| lack of transparency (D82) | higher variability of output (D29) |
| constructive ambiguity (D84) | higher variability of inflation (E31) |
| constructive ambiguity (D84) | smaller output gaps (E23) |
| transparency (G38) | variability of inflation (E31) |
| transparency (G38) | variability of output (E23) |