Discussion paper

DP4117 Three Models of Imperfect Transparency in Monetary Policy

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.


Hughes Hallett, A and M Demertzis (2003), ‘DP4117 Three Models of Imperfect Transparency in Monetary Policy‘, CEPR Discussion Paper No. 4117. CEPR Press, Paris & London. https://cepr.org/publications/dp4117