Transparency, Flexibility and Macroeconomic Stabilization
36 Pages Posted: 6 Mar 2014
Date Written: February 20, 2014
Abstract
Many central banks have become more transparent during the last decade, in particular about macroeconomic prospects. This paper shows that such economic transparency could give central banks greater flexibility to respond to macroeconomic shocks. In particular, it allows central banks to stabilize aggregate demand and supply shocks without affecting private sector inflation expectations. In contrast, opaque central banks limit their stabilization efforts to avoid disturbing inflation expectations. As a result, they mute their interest rate response and no longer fully offset anticipated demand shocks. This leads to macroeconomic volatility that is socially detrimental.
Keywords: transparency, monetary policy, macroeconomic stabilization
JEL Classification: E520, E580
Suggested Citation: Suggested Citation