Working Paper: CEPR ID: DP6889
Authors: Carin A.B. van der Cruijsen; Sylvester C.W. Eijffinger; Lex Hoogduin
Abstract: Should central banks increase their degree of transparency any further? We show that there is likely to be an optimal intermediate degree of central bank transparency. Up to this optimum more transparency is desirable: it improves the quality of private sector inflation forecasts. But beyond the optimum people might: (1) start to attach too much weight to the conditionality of their forecasts, and/or (2) get confused by the large and increasing amount of information they receive. This deteriorates the (perceived) quality of private sector inflation forecasts. Inflation then is set in a more backward looking manner resulting in higher inflation persistence. By using a panel data set on the transparency of 100 central banks we find empirical support for an optimal intermediate degree of transparency at which inflation persistence is minimized. Our results indicate that while there are central banks that would benefit from further transparency increases, some might already have reached the limit.
Keywords: Central Bank Transparency; Inflation Persistence; Monetary Policy
JEL Codes: E31; E52; E58
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| central bank transparency (E58) | inflation persistence (E31) |
| optimal degree of central bank transparency (E58) | inflation persistence (E31) |
| low levels of transparency (D73) | quality of inflation forecasts (E31) |
| increased transparency (G38) | quality of inflation forecasts (E31) |
| too much transparency (D73) | confusion/information overload (D80) |
| confusion/information overload (D80) | quality of inflation forecasts (E31) |
| quality of inflation forecasts (E31) | inflation persistence (E31) |
| increased transparency (G38) | inflation persistence (E31) |
| optimal level of transparency (H21) | inflation persistence (E31) |