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The Costs of Increasing Transparency

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Author Info

  • Maria Demertzis

    ()

  • Marco Hoeberichts

    ()

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    Abstract

    In their seminal paper, Morris and Shin (Amer Econ Rev 92(5): 1521–1534, 2002a ) argued that increasing the precision of public information is not always beneficial to social welfare. Svensson (Amer Econ Rev 96: 448–451, 2006 ) however has disputed this by saying that although feasible, the conditions for which this was true, were not all that likely. In that respect, therefore, increasing ‘transparency’ remains most of the times beneficial to social welfare. In this paper, we extend the Morris and Shin attempt by setting it up as an explicit interactive game between the Central Bank, the objectives of which we model explicitly, and the private sector. We show that in the absence of costs, both players benefit from transparency in the manner described previously in the literature, and point the differences in their gains. Following that, we then introduce the fact that increasing transparency comes at some costs and show how both players face incentives to free ride on each other as a result. The presence of costs thus alters the way in which greater transparency is attained. Copyright Springer Science+Business Media, LLC 2007

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    File URL: http://hdl.handle.net/10.1007/s11079-007-9037-5
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    Bibliographic Info

    Article provided by Springer in its journal Open Economies Review.

    Volume (Year): 18 (2007)
    Issue (Month): 3 (July)
    Pages: 263-280

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    Handle: RePEc:kap:openec:v:18:y:2007:i:3:p:263-280

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    Web page: http://www.springerlink.com/link.asp?id=100323

    Related research

    Keywords: Public and private signals; High order expectations; Monetary policy as an information game; E31; E52; E58;

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    References

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    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.:
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    1. Hyun Song Shin & Jeffery D. Amato, 2003. "Public and Private Information in Monetary Policy Models," Computing in Economics and Finance 2003 38, Society for Computational Economics.
    2. Stephen Morris & Hyun Song Shin, 2002. "Social Value of Public Information," American Economic Review, American Economic Association, vol. 92(5), pages 1521-1534, December.
    3. Jeffery Amato & Stephen Morris & Hyun Song Shin, 2003. "Communication and Monetary Policy," Levine's Working Paper Archive 506439000000000330, David K. Levine.
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    Cited by:
    1. Menno Middeldorp, 2011. "Central Bank Transparency, the Accuracy of Professional Forecasts, and Interest Rate Volatility," Working Papers 11-12, Utrecht School of Economics.
    2. Cruijsen, C.A.B. van der & Eijffinger, S.C.W. & Hoogduin, L.H., 2008. "Optimal Central Bank Transparency," Discussion Paper 2008-59, Tilburg University, Center for Economic Research.
    3. M.H. Middeldorp, 2011. "FOMC Communication Policy and the Accuracy of Fed Funds Futures," Working Papers 11-13, Utrecht School of Economics.
    4. Maria Demertzis, 2009. "The 'Wisdom of the Crowds' and Public Policy," DNB Working Papers 203, Netherlands Central Bank, Research Department.
    5. Demertzis, Maria & Hughes Hallett, Andrew, 2008. "Asymmetric information and rational expectations: When is it right to be "wrong"?," Journal of International Money and Finance, Elsevier, vol. 27(8), pages 1407-1419, December.

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