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The Limits of Transparency

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Author Info
Cukierman, Alex

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Abstract

This paper probes the limits of transparency in monetary policymaking along two dimensions: feasibility and desirability. It argues that, due to limited knowledge about the economy, even central banks that are considered champions of openness are not very clear about their measures of the output gap and about their beliefs regarding the effect of policy on inflationary expectations. Consequently feasibility constraints on transparency are more serious than stylized models of the transmission mechanism would imply. In addition no central bank has made clear statements about its objective function, including in particular the relative weight on output versus inflation stabilization, the policy discount factor and the shape of losses from the inflation and the output gaps over the possible ranges of realizations of those variables. The paper also argues that there is a trade-off between full transparency and full utilization of information in setting policy and that excessive transparency may facilitate the exertion of political pressures on the central bank. The last section of the paper abstracts from feasibility constraints and discusses the desirable levels of openness in various areas of the policymaking process. It is argued that the strongest case against immediate transparency arises when the CB has private information about problems within segments of the financial system. Premature release of information may, in such a case, destroy efficient risk sharing arrangements and long term investments by triggering a run on the financial system. This is illustrated within the context of the classic Diamond Dybvig model of bank runs. The paper also probes the desirable levels of transparency in other areas of the policymaking process like the bank's objective function, the bank's output target, forecasts of economic shocks, disagreements within the CB board and the bank's own ignorance.

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Paper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 6475.

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Date of creation: Sep 2007
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Handle: RePEc:cpr:ceprdp:6475

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Related research
Keywords: monetary policy; Transparency - actual and desirable;

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Find related papers by JEL classification:
E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies
E61 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Policy Objectives; Policy Designs and Consistency; Policy Coordination

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References listed on IDEAS
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Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Gosselin, Pierre & Lotz, Aileen & Wyplosz, Charles, 2007. "Interest Rate Signals and Central Bank Transparency," CEPR Discussion Papers 6454, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
    Other versions:
  2. Marek Rozkrut, 2008. "It’s not only WHAT is said, it’s also WHO the speaker is. Evaluating the effectiveness of central bank communication," National Bank of Poland Working Papers 47, National Bank of Poland, Economic Institute. [Downloadable!]
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