Does Central Bank Transparency Impact Financial Markets? A Cross‐Country Econometric Analysis

Blinder et al. (2001) argues that more open public disclosure of central bank policies may enhance the efficiency of markets. We examine this claim by studying for a set of seven industrialized countries whether selected central banks' moves toward more open disclosure during the 1990s improved or worsened the predictability of the corresponding national financial markets. Employing methodologies analogous to Campbell and Shiller (1991), we find that for all countries, the forecasting error has decreased for interest rates on the respective government bonds across most maturity lengths, and that the expectations hypothesis has generally performed better at the short end of the yield curve. Our results also tentatively show that the effects are stronger for central banks that made the move to greater disclosure, compared to those banks that resisted increasing the public's information set. These findings are consistent with Tabellini's (1987) view that central bank secrecy will hinder the smooth functioning of financial markets.