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Transparency and Monetary Policy Effectiveness

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  • Romain Baeriswyl
  • Camille Cornand

Abstract

This article analyses the effects of economic transparency on the optimal monetary policy in an economy affected by demand shocks. In an environment of imperfect common knowledge, demand shocks create a trade-off between stabilizing the price level and stabilizing the output gap. The monetary policy implemented by the central bank tends, on the one hand, to offset demand shocks but, on the other hand, to distort the economy because of its mistaken view of the fundamental state of the economy. Transparency is optimal as long as the central bank does not weight the stabilization of the output gap too heavily in its objective function.

Suggested Citation

  • Romain Baeriswyl & Camille Cornand, 2011. "Transparency and Monetary Policy Effectiveness," Annals of Economics and Statistics, GENES, issue 103-104, pages 175-194.
    • Handle: RePEc:adr:anecst:y:2011:i:103-104:p:175-194
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    File URL: http://www.jstor.org/stable/41615498
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    Cited by:

    1. Salle, Isabelle & Yıldızoğlu, Murat & Sénégas, Marc-Alexandre, 2013. "Inflation targeting in a learning economy: An ABM perspective," Economic Modelling, Elsevier, vol. 34(C), pages 114-128.
    2. Alex Isakov & Petr Grishin & Oleg Gorlinsky, 2018. "Fear of Forward Guidance," Russian Journal of Money and Finance, Bank of Russia, vol. 77(4), pages 84-106, December.
    3. Jonathan G. James & Phillip Lawler, 2015. "Heterogeneous private sector information, central bank disclosure, and stabilization policy," Southern Economic Journal, John Wiley & Sons, vol. 82(2), pages 620-634, October.
    4. Jalali Naini , Ahmad-Reza & Naderian , Mohammad-Amin, 2014. "Social Value of Information and Optimal Communication Policy of Central Banks," Journal of Money and Economy, Monetary and Banking Research Institute, Central Bank of the Islamic Republic of Iran, vol. 9(3), pages 31-57, April.
    5. Myatt, David P. & Wallace, Chris, 2014. "Central bank communication design in a Lucas-Phelps economy," Journal of Monetary Economics, Elsevier, vol. 63(C), pages 64-79.
    6. Jonathan G. James & Phillip Lawler, 2012. "Strategic Complementarity, Stabilization Policy, and the Optimal Degree of Publicity," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 44(4), pages 551-572, June.
    7. Myatt, David P. & Wallace, Chris, 2015. "Cournot competition and the social value of information," Journal of Economic Theory, Elsevier, vol. 158(PB), pages 466-506.

    More about this item

    JEL classification:

    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design

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