Measures have been taken by the Bank of Canada to increase the transparency of Canadian monetary policy. This paper examines whether the greater transparency has improved financial markets’ understanding of the conduct of monetary policy. In theory, it should result in reduced conditional uncertainty because investor expectations would be formed with a superior information set. The market’s response to releases of the Bank of Canada’s Monetary Policy Report and to changes in the Bank’s operating band for the overnight interest rate is examined. The empirical results suggest that the Bank’s efforts at increasing transparency appear to have helped market participants anticipate pending monetary policy actions. Indeed, the amount of uncertainty that surrounds the Bank’s actions is now broadly consistent with that reported for other major countries. The issue of whether there should be limits on the amount of transparency in the conduct of monetary policy is also explored. The paper concludes that there is possibly some merit in the Bank’s providing more frequent information on its economic outlook and highlighting the uncertainty that surrounds the Bank’s views. However, the paper argues against publishing the detailed results of the Bank’s economic projections. It also notes that the element of surprise can be useful on occasion with respect to the Bank’s operations in financial markets.
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Paper provided by Bank of Canada in its series Technical Reports with number
86.
Find related papers by JEL classification: E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies
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Paul Jenkins & Brian O'Reilly, 2001.
"Monetary Policy and the Economic Well-being of Canadians,"
The Review of Economic Performance and Social Progress,
in: Andrew Sharpe, Executive Director & France St-Hilaire, Vice-President , Research & Keith Banting, Di (ed.), The Review of Economic Performance and Social Progress 2001: The Longest Decade: Canada in the 1990s, volume 1
Centre for the Study of Living Standards & The Institutute for Research on Public Policy.
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