Central Bank Communication and Output Stabilization

23 Pages Posted: 29 Jun 2004

See all articles by Sylvester C. W. Eijffinger

Sylvester C. W. Eijffinger

Tilburg University (CentER) - Department of Economics; CESifo (Center for Economic Studies and Ifo Institute); Centre for Economic Policy Research (CEPR)

Marco Hoeberichts

De Nederlandsche Bank - Research Department

M. F. Tesfaselassie

affiliation not provided to SSRN

Multiple version iconThere are 2 versions of this paper

Date Written: June 2004

Abstract

Some central banks have a reputation for being secretive. A justification for this behaviour that we find in the literature is that being transparent about operations and beliefs hinders the central bank in achieving the best outcome. In other words, a central bank needs flexibility and, therefore, cannot be fully transparent. Using a forward-looking New-Keynesian model, we find exactly the opposite. A central bank that is conservative improves output stabilization by being transparent about the procedures it uses to assess the economy and, especially, about the forecast errors it makes. Under certain conditions, transparency by a conservative central bank also improves interest rate stabilization. We also find that higher transparency makes it optimal for the central bank to be more conservative as the benefits from higher transparency in terms of output stabilization are greater the more conservative the central bank is.

Keywords: Monetary policy, central bank, information processing, expectation formation

JEL Classification: D83, E52, E58

Suggested Citation

Eijffinger, Sylvester C. W. and Hoeberichts, Marco M. and tesfaselassie, mewael F., Central Bank Communication and Output Stabilization (June 2004). CEPR Discussion Paper No. 4408. Available at SSRN: https://ssrn.com/abstract=560302

Sylvester C. W. Eijffinger (Contact Author)

Tilburg University (CentER) - Department of Economics ( email )

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CESifo (Center for Economic Studies and Ifo Institute)

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HOME PAGE: http://www.CESifo.de

Centre for Economic Policy Research (CEPR)

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Marco M. Hoeberichts

De Nederlandsche Bank - Research Department ( email )

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Netherlands
+31-20-524 2890 (Phone)
+31-20-524 2529 (Fax)

Mewael F. Tesfaselassie

affiliation not provided to SSRN ( email )

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