Working Paper: CEPR ID: DP4854
Authors: Sylvester C. W. Eijffinger; Mewael F. Tesfaselassie
Abstract: In a simple macromodel with forward-looking expectations, this Paper looks into disclosure policy when a central bank has private information on future shocks. The main result is that advance disclosure of forecasts of future shocks does not improve welfare, and in some cases is not desirable as it impairs stabilization of current inflation and/or output. This result holds when there is no credibility problem or the central bank?s preference is common knowledge. When there is uncertainty about the central bank?s preference shock, and this uncertainty is not resolved in the subsequent period, advance disclosure does not matter for current outcomes. The reason lies in the strong dependence of one-period-ahead private sector inflation forecasts on central bank actions, which induces the central bank to focus exclusively on price stability in subsequent periods. Another implication of the model is that, in contrast to forecasts of current period shocks emphasized by the literature, forecasts of future shocks may not be revealed to the public by current policy choices because the central bank refrains from responding to its own forecasts.
Keywords: central bank disclosure; central bank forecasts; central bank transparency; forward-looking expectations; private information
JEL Codes: E42; E43; E52; E58
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| advance disclosure of forecasts of future shocks (G17) | does not improve welfare (D69) |
| advance disclosure of forecasts of future shocks (G17) | can impair stabilization of current inflation and output (E31) |
| central bank's disclosure of future shocks (E60) | stabilization of inflation and output (E63) |
| central bank's private information about future shocks (E58) | increased volatility in private sector inflation expectations (E31) |
| central bank's focus on price stability (E58) | dependence of one-period-ahead inflation forecasts on its actions (E47) |
| common knowledge of central bank's output target (E52) | delays in disclosure until after market expectations are formed (G14) |
| withholding information about future shocks (D84) | maintain stability in current economic conditions (E66) |