Three Models of Imperfect Transparency in Monetary Policy

32 Pages Posted: 6 Jan 2004

See all articles by Maria Demertzis

Maria Demertzis

Bruegel

Andrew J. Hughes

Cardiff Business School; Centre for Economic Policy Research (CEPR); Vanderbilt University - College of Arts and Science - Department of Economics

Date Written: November 2003

Abstract

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.

Keywords: Imperfect transparency, ambiguity, rational inattention, independent monetary policies

JEL Classification: E52, E58

Suggested Citation

Demertzis, Maria and Hughes Hallett, Andrew J., Three Models of Imperfect Transparency in Monetary Policy (November 2003). CEPR Discussion Paper No. 4117. Available at SSRN: https://ssrn.com/abstract=480647

Maria Demertzis

Bruegel ( email )

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Andrew J. Hughes Hallett (Contact Author)

Cardiff Business School ( email )

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Centre for Economic Policy Research (CEPR)

London
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Vanderbilt University - College of Arts and Science - Department of Economics ( email )

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615-322-8539 (Phone)
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