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Imperfect transparency and shifts in the central bank's output gap target

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Westelius, Niklas J.

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Abstract

In the New Keynesian framework, the public's expectation about the future path of monetary policy is an important determinant of current economic conditions. This paper examines the impact of unobservable shifts in the central bank's output gap target on inflation and output dynamics. I show that when the degree of persistence of a shock is private information of the central bank, and policy is discretionary in nature, it is optimal for the central bank not to reveal the future expected path of the output gap target. Perfect transparency unambiguously increases inflation and output volatility and thus lowers welfare.

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Publisher Info
Article provided by Elsevier in its journal Journal of Economic Dynamics and Control.

Volume (Year): 33 (2009)
Issue (Month): 4 (April)
Pages: 985-996
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Handle: RePEc:eee:dyncon:v:33:y:2009:i:4:p:985-996

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Related research
Keywords: Discretionary monetary policy New Keynesian Phillips curve Transparency Kalman filter Learning;

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References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
  1. Frederic S Mishkin, 2004. "Can Central Bank Transparency Go Too Far?," RBA Annual Conference Volume, in: Christopher Kent & Simon Guttmann (ed.), The Future of Inflation Targeting Reserve Bank of Australia. [Downloadable!]
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  2. Blake, Andrew P., 2002. "A 'Timeless Perspective' on Optimality in Forward-Looking Rational Expectations Models," Royal Economic Society Annual Conference 2002 30, Royal Economic Society. [Downloadable!]
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  3. Julio Rotemberg & Michael Woodford, 1997. "An Optimization-Based Econometric Framework for the Evaluation of Monetary Policy," NBER Chapters, in: NBER Macroeconomics Annual 1997, Volume 12, pages 297-361 National Bureau of Economic Research, Inc. [Downloadable!]
  4. Bennett T. McCallum & Edward Nelson, 2004. "Timeless perspective vs. discretionary monetary policy in forward-looking models," Review, Federal Reserve Bank of St. Louis, issue Mar, pages 43-56. [Downloadable!]
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