Can Central Bank Transparency Go Too Far?

33 Pages Posted: 25 Oct 2004 Last revised: 5 Aug 2010

See all articles by Frederic S. Mishkin

Frederic S. Mishkin

Columbia Business School - Finance and Economics; National Bureau of Economic Research (NBER)

Date Written: October 2004

Abstract

This paper asks the question: can central bank transparency go too far? Transparency is beneficial only when it serves to simplify communication with the public and helps generate support for central banks to conduct monetary policy optimally with an appropriate focus on long-run objectives. This paper argues that some suggestions for increased transparency, particularly a central bank announcement of its objective function or projections of the path of the policy interest rate, will complicate the communication process and weaken support for a central bank focus on long-run objectives. Transparency can indeed go too far. However, central banks can improve transparency in discussing that they do care about reducing output fluctuations . By describing procedures for how the path and horizon of inflation targets would be modified in the face of large shocks, by emphasizing that monetary policy will be just as vigilant in preventing inflation from falling too low as it is from preventing it from being too high, and by indicating that the central bank will pursue expansionary policies when output falls very far below potential, central banks can show that they do care about output fluctuations. These steps to improve transparency will increase support for the central bank's policies and independence, but avoid a focus on the short run that could interfere with the ability of the central bank to do its job effectively.

Suggested Citation

Mishkin, Frederic S., Can Central Bank Transparency Go Too Far? (October 2004). NBER Working Paper No. w10829, Available at SSRN: https://ssrn.com/abstract=603649

Frederic S. Mishkin (Contact Author)

Columbia Business School - Finance and Economics ( email )

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National Bureau of Economic Research (NBER)

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