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The Mystique of Central Bank Speak

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  • Geraats, P.M.

Abstract

Despite the recent trend towards greater transparency of monetary policy, in many respects central bankers still prefer to speak with mystique. This paper shows that the resulting perception of ambiguity could be desirable. Under the plausible assumption that there is imperfect common knowledge about the degree of central bank transparency, economic outcomes are affected by both the actual and perceived degree of transparency. It is shown that actual transparency is beneficial but that it may be useful to create the perception of opacity. The optimal communication strategy for the central bank is to provide clarity about the inflation target and to communicate information about the output target and supply shocks with perceived ambiguity. In this respect, the central bank benefits from sustaining transparency misperceptions, which helps to explain the mystique of central bank speak.

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Bibliographic Info

Paper provided by Faculty of Economics, University of Cambridge in its series Cambridge Working Papers in Economics with number 0543.

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Length: 29
Date of creation: Oct 2005
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Handle: RePEc:cam:camdae:0543

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Keywords: Transparency; monetary policy; communication; transparency misperceptions.;

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  1. Jensen, Henrik, 2001. "Optimal degrees of transparency in monetary policymaking," Discussion Paper Series 1: Economic Studies 2001,04, Deutsche Bundesbank, Research Centre.
  2. S[empty]rensen, Jan Rose, 1991. "Political uncertainty and macroeconomic performance," Economics Letters, Elsevier, vol. 37(4), pages 377-381, December.
  3. Jon Faust & Lars E.O. Svensson, 1998. "Transparency and credibility: monetary policy with unobservable goals," International Finance Discussion Papers 605, Board of Governors of the Federal Reserve System (U.S.).
  4. Petra M. Geraats, 2002. "Central Bank Transparency," Economic Journal, Royal Economic Society, vol. 112(483), pages 532-565, November.
  5. Stein, Jeremy C, 1989. "Cheap Talk and the Fed: A Theory of Imprecise Policy Announcements," American Economic Review, American Economic Association, vol. 79(1), pages 32-42, March.
  6. Geraats, P.M., 2004. "Modelling Stochastic Relative Preferences," Cambridge Working Papers in Economics 0468, Faculty of Economics, University of Cambridge.
  7. Geraats Petra M., 2005. "Transparency and Reputation: The Publication of Central Bank Forecasts," The B.E. Journal of Macroeconomics, De Gruyter, vol. 5(1), pages 1-28, February.
  8. Eijffinger, S.C.W. & Hoeberichts, M.M. & Schaling, E., 1997. "Why Money Talks and Wealth Whispers: Monetary Uncertainty and Mystique," Discussion Paper 1997-47, Tilburg University, Center for Economic Research.
  9. Beetsma, Roel M W J & Jensen, Henrik, 2003. " Why Money Talks and Wealth Whispers: Monetary Uncertainty and Mystique: Comment," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 35(1), pages 129-36, February.
  10. Goodfriend, Marvin, 1986. "Monetary mystique: Secrecy and central banking," Journal of Monetary Economics, Elsevier, vol. 17(1), pages 63-92, January.
  11. Volker Hahn, 2009. "Transparency of Central Bank Preferences," German Economic Review, Verein für Socialpolitik, vol. 10, pages 32-49, 02.
  12. Cukierman, Alex & Meltzer, Allan H, 1986. "A Theory of Ambiguity, Credibility, and Inflation under Discretion and Asymmetric Information," Econometrica, Econometric Society, vol. 54(5), pages 1099-1128, September.
  13. Petra M. Geraats, 2006. "Transparency of Monetary Policy: Theory and Practice," CESifo Economic Studies, CESifo, vol. 52(1), pages 111-152, March.
  14. Stephen Morris & Hyun Song Shin, 2002. "Social Value of Public Information," American Economic Review, American Economic Association, vol. 92(5), pages 1521-1534, December.
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