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The Limits of Transparency

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  • Alex Cukierman

Abstract

This paper probes the limits of transparency in monetary policymaking along two dimensions: feasibility and desirability. It argues that, due to limited knowledge about the economy, even central banks (CBs) that are considered champions of openness are not very clear about their measurement of the output gap and about their beliefs regarding the effect of policy on inflationary expectations. Consequently, feasibility constraints on transparency are more serious than stylized models of the transmission mechanism would imply. In addition, no CB has made clear statements about its objective function, including in particular the relative weight on output versus inflation stabilization, the policy discount factor and the shape of losses from the inflation and the output gaps over the possible ranges of realizations of those variables. Copyright 2009 The Author Journal compilation 2009 Banca Monte dei Paschi di Siena SpA.

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Article provided by Banca Monte dei Paschi di Siena SpA in its journal Economic Notes.

Volume (Year): 38 (2009)
Issue (Month): 1-2 (02)
Pages: 1-37

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Handle: RePEc:bla:ecnote:v:38:y:2009:i:1-2:p:1-37

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Cited by:
  1. Carsten Hefeker & Blandine Zimmer, 2010. "Central bank independence and conservatism under uncertainty: Substitutes or complements?," MAGKS Papers on Economics, Philipps-Universität Marburg, Faculty of Business Administration and Economics, Department of Economics (Volkswirtschaftliche Abteilung) 201001, Philipps-Universität Marburg, Faculty of Business Administration and Economics, Department of Economics (Volkswirtschaftliche Abteilung).
  2. Born, Benjamin & Ehrmann, Michael & Fratzscher, Marcel, 2010. "Macroprudential policy and central bank communication," CEPR Discussion Papers, C.E.P.R. Discussion Papers 8094, C.E.P.R. Discussion Papers.
  3. Eijffinger, Sylvester C W & Hoogduin, Lex & van der Cruijsen, Carin A B, 2008. "Optimal Central Bank Transparency," CEPR Discussion Papers, C.E.P.R. Discussion Papers 6889, C.E.P.R. Discussion Papers.
  4. Gamber, Edward N. & Smith, Julie K., 2009. "Are the Fed's inflation forecasts still superior to the private sector's?," Journal of Macroeconomics, Elsevier, Elsevier, vol. 31(2), pages 240-251, June.
  5. Gosselin, Pierre & Lotz, Aileen & Wyplosz, Charles, 2007. "Interest Rate Signals and Central Bank Transparency," CEPR Discussion Papers, C.E.P.R. Discussion Papers 6454, C.E.P.R. Discussion Papers.
  6. Sánchez, Marcelo, 2011. "Monetary strictness and labour market outcomes under incomplete transparency," Research in Economics, Elsevier, Elsevier, vol. 65(2), pages 95-99, June.
  7. Hefeker, Carsten & Zimmer, Blandine, 2011. "The optimal choice of central bank independence and conservatism under uncertainty," Journal of Macroeconomics, Elsevier, Elsevier, vol. 33(4), pages 595-606.
  8. Marek Rozkrut, 2008. "It’s not only WHAT is said, it’s also WHO the speaker is. Evaluating the effectiveness of central bank communication," National Bank of Poland Working Papers, National Bank of Poland, Economic Institute 47, National Bank of Poland, Economic Institute.

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