Uncertainty, Transparency and Future Monetary Policy

Abstract

In 1994 the Federal Reserve System moved to a more transparent reporting of monetary policy. In this paper we first discuss the various sources of uncertainty that play an essential role in the formulation and conduct of monetary policy and evaluate the degree of uncertainty faced by monetary policy makers. We also analyze the conditions that influence uncertainty about monetary policy and give an overview of central bank transparency abroad and Federal Reserve transparency in U.S. in particular. Finally we assess the empirical impact of monetary policy transparency on the uncertainty about future monetary policy using T-bill rate forecast dispersions from the Survey of Professional Forecasters as a proxy for monetary policy uncertainty. Our empirical findings confirm that Federal Reserve transparency has reduced the uncertainty of future monetary policy anticipated by market participants.

Keywords: uncertainty, transparency, monetary policy

JEL Classification: E44, E52, E58