Transparency in Monetary Policy, Signaling, and Heterogeneous Information
29 Pages Posted: 5 Jun 2010
Date Written: February 26, 2010
In this paper we examine whether publishing the information underlying the central bank’s decisions is socially desirable. We show that opacity may lead to the same equilibrium as transparency. However, additional equilibria may emerge under opacity with adverse consequences for welfare. Moreover, we explore the extent to which the central bank can use communication as a substitute for monetary policy when its hands are tied due to long lags between monetary-policy implementation and its effects on inflation and output. In this case, transparency has ambiguous effects. It reduces output variance and the distortions stemming from heterogeneous information. However, transparency generally raises the variance of inflation. On balance, transparency is plausible to be socially desirable. We also argue that a conflict of interests may arise between society and the central bank with regard to transparency.
Keywords: monetary policy, transparency, signaling, heterogeneous information
JEL Classification: D82, D83, E58
Suggested Citation: Suggested Citation