Is Central Banks’ Effectiveness Related to their Transparency? A Case of European Economies

This article presents a novel transparency measure and examines forward-looking transparency of six European central banks. It aims at evaluating whether the higher degree of transparency is related to better economic stabilization expressed in terms of output and inflation gap minimization. The methods used are based on data and a statistical analysis. To extract the cyclical component of time series, the Hodrick-Prescott filter is employed. The research covers the Czech National Bank, the National Bank of Hungary, the National Bank of Poland, the National Bank of Romania, the Bank of England, and the Sveriges Riksbank during 1997–2016. Firstly, we develop an index of forward-looking transparency that focuses on signalling intentions by the central banks. It is one of the main contributions of our article. Secondly, we compare transparency in the field of signaling intentions within our sample, which is another aspect of originality of this study. The results indicate that the Czech National Bank and the central banks of developed economies outperform the other central banks from our sample in terms of openness. Finally, under some caveats, we relate the degree of transparency to the levels and volatility of output and inflation gaps. We find the existence of the relationship between the central banks’ transparency and their effectiveness mainly for Czech Republic and the UK, but also, although to a lesser extent, for Poland and Romania.