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The Equilibrium Degree of Transparency and Control in Monetary Policy

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  • Faust, Jon
  • Svensson, Lars E O

Abstract

We examine a central bank's endogenous choice of degree of control and degree of transparency, under both commitment and discretion. We argue that discretion is the more realistic assumption for the choice of control and that commitment is more realistic for the choice of transparency. For the choice of control, under discretion maximum degree of control is the only equilibrium. For the choice of transparency, under commitment, a sufficiently patient bank with sufficiently low average inflation bias will always choose minimum transparency. Thus, a maximum feasible degree of control with a minimum degree of transparency is a likely outcome. The Bundesbank and the Federal Reserve System are, arguably, examples of this.

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Bibliographic Info

Article provided by Blackwell Publishing in its journal Journal of Money, Credit and Banking.

Volume (Year): 34 (2002)
Issue (Month): 2 (May)
Pages: 520-39

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Handle: RePEc:mcb:jmoncb:v:34:y:2002:i:2:p:520-39

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Web page: http://www.blackwellpublishing.com/journal.asp?ref=0022-2879

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