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The impact of central bank transparency on inflation expectations

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  • van der Cruijsen, Carin
  • Demertzis, Maria

Abstract

In contrast to previous empirical attempts to examine the effect of increasing central bank transparency on macroeconomic magnitudes, we investigate how the link between inflation and inflation expectations alters with increasing transparency. Our motivation stems from the belief that changes in the institutional features or operations of the Central Bank affect, first and foremost, the way that private agents form their expectations about the future behaviour of the Central Bank, and only through them, inflation. We apply the framework used by Levin et al (2004) who differentiate between inflation targeters and countries that do not have explicit quantitative objectives. They discover that inflation targeters benefit from a weaker link between inflation and expectations, and the more so for longer horizons. We, in turn, examine whether this observation still holds as central banks become more transparent. Our attempt is facilitated by the recent development of quantitative measures for transparency, used in the main text. We find that our results provide some evidence to substantiate the beneficial impact of transparency, on helping fix private sector expectations.

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Bibliographic Info

Article provided by Elsevier in its journal European Journal of Political Economy.

Volume (Year): 23 (2007)
Issue (Month): 1 (March)
Pages: 51-66

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Handle: RePEc:eee:poleco:v:23:y:2007:i:1:p:51-66

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Web page: http://www.elsevier.com/locate/inca/505544

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  1. Geraats, P. & Eijffinger, S.C.W. & Cruijsen, C.A.B. van der, 2006. "Does Central Bank Transparancy Reduce Interest Rates?," Discussion Paper, Tilburg University, Center for Economic Research 2006-11, Tilburg University, Center for Economic Research.
  2. Hansen,B.E., 1998. "The grid bootstrap and the autoregressive model," Working papers, Wisconsin Madison - Social Systems 26, Wisconsin Madison - Social Systems.
  3. Geraats, P.M., 2001. "Why Adopt Transparency? The Publication of Central Bank Forecasts," Papers 41, Quebec a Montreal - Recherche en gestion.
  4. Faust, J. & Svensson, L.E.O., 1999. "The Equilibrium Degree of Transparency and Control in Monetary Policy," Papers, Stockholm - International Economic Studies 669, Stockholm - International Economic Studies.
  5. Petra M. Geraats, 2002. "Central Bank Transparency," Economic Journal, Royal Economic Society, Royal Economic Society, vol. 112(483), pages 532-565, November.
  6. Muller, P. & M. Zelmer, 1999. "Greater Transparency in Monetary Policy: Impact on Financial Markets," Technical Reports, Bank of Canada 86, Bank of Canada.
  7. Maria Demertzis & Andrew Hughes Hallett, 2004. "Central bank transparency in theory and practice," Money Macro and Finance (MMF) Research Group Conference 2003, Money Macro and Finance Research Group 23, Money Macro and Finance Research Group.
  8. Alan S. Blinder, 2000. "Central-Bank Credibility: Why Do We Care? How Do We Build It?," American Economic Review, American Economic Association, American Economic Association, vol. 90(5), pages 1421-1431, December.
  9. Roy Batchelor, 2001. "How useful are the forecasts of intergovernmental agencies? The IMF and OECD versus the consensus," Applied Economics, Taylor & Francis Journals, Taylor & Francis Journals, vol. 33(2), pages 225-235.
  10. Henrik Jensen, . "Optimal Degrees of Tranaparency in Monetary Policymaking," EPRU Working Paper Series, Economic Policy Research Unit (EPRU), University of Copenhagen. Department of Economics 01-01, Economic Policy Research Unit (EPRU), University of Copenhagen. Department of Economics.
  11. Eijffinger, S.C.W. & Geraats, P.M., 2004. "How Transparent Are Central Banks?," Cambridge Working Papers in Economics, Faculty of Economics, University of Cambridge 0411, Faculty of Economics, University of Cambridge.
  12. Willem H. Buiter, 1999. "Alice in Euroland," LSE Research Online Documents on Economics, London School of Economics and Political Science, LSE Library 20226, London School of Economics and Political Science, LSE Library.
  13. Andrew T. Levin & Fabio M. Natalucci & Jeremy M. Piger, 2004. "The macroeconomic effects of inflation targeting," Review, Federal Reserve Bank of St. Louis, Federal Reserve Bank of St. Louis, issue Jul, pages 51-80.
  14. Georgios Chortareas & David Stasavage & Gabriel Sterne, 2002. "Does it pay to be transparent? international evidence form central bank forecasts," Review, Federal Reserve Bank of St. Louis, Federal Reserve Bank of St. Louis, issue Jul, pages 99-118.
  15. Georgios Chortareas & David Stasavage & Gabriel Sterne, 2003. "Does monetary policy transparency reduce disinflation costs?," Manchester School, University of Manchester, vol. 71(5), pages 521-540, 09.
  16. Jonathan Coppel & Ellis Connolly, 2003. "What Do Financial Market Data Tell Us about Monetary Policy Transparency?," RBA Research Discussion Papers, Reserve Bank of Australia rdp2003-05, Reserve Bank of Australia.
  17. Jakob Haan & Fabian Amtenbrink & Sandra Waller, 2004. "The Transparency and Credibility of the European Central Bank," Journal of Common Market Studies, Wiley Blackwell, Wiley Blackwell, vol. 42(4), pages 775-794, November.
  18. James H. Stock, 1991. "Confidence Intervals for the Largest Autoresgressive Root in U.S. Macroeconomic Time Series," NBER Technical Working Papers 0105, National Bureau of Economic Research, Inc.
  19. King, Mervyn, 1997. "Changes in UK monetary policy: Rules and discretion in practice," Journal of Monetary Economics, Elsevier, Elsevier, vol. 39(1), pages 81-97, June.
  20. Frederic S. Mishkin & Adam S. Posen, 1997. "Inflation targeting: lessons from four countries," Economic Policy Review, Federal Reserve Bank of New York, Federal Reserve Bank of New York, issue Aug, pages 9-110.
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