Optimal Degrees of Transparency in Monetary Policymaking

Abstract

According to most academics and policymakers, transparency in monetary policymaking is good for society. I examine this proposition in a small theoretical model where more transparency makes it easier for price setters to infer the central bank's true policy intentions. This induces the central bank to pay relatively much attention to inflation stabilization. In contrast with popular perceptions and most existing literature, I find that transparency need not always be advantageous. It may actually be a policy distorting straitjacket if the central bank enjoys good initial credibility, and there is need for active monetary stabilization policy.

Keywords: Transparency, monetary policy, central bank institutions

JEL Classification: E42, E52, F58