DP2689 Optimal Degrees of Transparency in Monetary Policymaking

Author(s): Henrik Jensen
Publication Date: February 2001
Keyword(s): Central Bank Institutions, Monetary Policy, Transparency
JEL(s): E42, E52, F58
Programme Areas: International Macroeconomics
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=2689

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.