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The Costs of Increasing Transparency

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Author Info

  • Maria Demertzis
  • Marco Hoeberichts

Abstract

In their seminal paper, Morris and Shin (2002a) argued that increasing the precision of public information is not always bene.cial to social welfare. Svensson (2005) however has disputed this by saying that although feasible, the conditions for which this was true, were not at all that likely. In that respect, therefore, increasing transparency remains most of the times beneficial to social welfare. In this paper, we extend the Morris and Shin attempt, by setting it up as an explicit interactive game between the Central Bank, the objectives of which we model explicitly, and the private sector. We show that in the absence of costs, both players benefit from transparency, in the manner described previously in the literature, and point the di�erences in their gains. Following that, we then introduce the fact that increasing transparency comes at some costs, and show how both players face incentives to free ride on each other as a result. The presence of costs, thus alters the way in which greater transparency is attained.

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Bibliographic Info

Paper provided by Netherlands Central Bank, Research Department in its series DNB Working Papers with number 080.

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Date of creation: Jan 2006
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Handle: RePEc:dnb:dnbwpp:080

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Related research

Keywords: Public and Private Signals; High Order Expectations; Monetary Policy.;

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References

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  1. Jeffrey D. Amado & Stephen Morris & Hyun Song Shin, 2003. "Communication and Monetary Policy," Cowles Foundation Discussion Papers 1405, Cowles Foundation for Research in Economics, Yale University.
  2. Orphanides, Athanasios & Williams, John C, 2005. "The Decline of Activist Stabilization Policy: Natural Rate Misperceptions, Learning and Expectations," CEPR Discussion Papers 4865, C.E.P.R. Discussion Papers.
  3. George-Marios Angeletos & Alessandro Pavan, 2004. "Transparency of Information and Coordination in Economies with Investment Complementarities," American Economic Review, American Economic Association, vol. 94(2), pages 91-98, May.
  4. Hyun Song Shin & Jeffery D. Amato, 2003. "Public and Private Information in Monetary Policy Models," Computing in Economics and Finance 2003 38, Society for Computational Economics.
  5. Stephen Morris & Hyun Song Shin, 2000. "Global Games: Theory and Applications," Cowles Foundation Discussion Papers 1275, Cowles Foundation for Research in Economics, Yale University.
  6. Antonio Fatas & Ilian Mihov & Andrew K. Rose, 2004. "Quantitative Goals for Monetary Policy," NBER Working Papers 10846, National Bureau of Economic Research, Inc.
  7. Maria Demertzis & Nicola Viegi, 2004. "Inflation Targets as Focal Points," DNB Working Papers 017, Netherlands Central Bank, Research Department.
  8. Michael Woodford, 2001. "Imperfect Common Knowledge and the Effects of Monetary Policy," NBER Working Papers 8673, National Bureau of Economic Research, Inc.
  9. 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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Citations

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Cited by:
  1. van der Cruijsen, Carin A.B. & Eijffinger, Sylvester C.W. & Hoogduin, Lex H., 2010. "Optimal central bank transparency," Journal of International Money and Finance, Elsevier, vol. 29(8), pages 1482-1507, December.
  2. Carin van der Cruijsen & Sylvester Eijffinger, 2007. "The economic impact of central bank transparency: a survey," DNB Working Papers 132, Netherlands Central Bank, Research Department.
  3. M.H. Middeldorp, 2011. "FOMC Communication Policy and the Accuracy of Fed Funds Futures," Working Papers 11-13, Utrecht School of Economics.
  4. C.J.M. Kool & S. Rosenkranz & M. Middeldorp, 2007. "Listening without understanding: Central Bank transparency, financial markets and the crowding out of private information," Working Papers 07-19, Utrecht School of Economics.
  5. Bryan Chapple, 2006. "Monetary policy strategies and credibility - theory and practice," DNB Occasional Studies 404, Netherlands Central Bank, Research Department.
  6. Menno Middeldorp, 2011. "Central Bank Transparency, the Accuracy of Professional Forecasts, and Interest Rate Volatility," Working Papers 11-12, Utrecht School of Economics.
  7. Demertzis, Maria & Hughes Hallett, Andrew, 2008. "Asymmetric information and rational expectations: When is it right to be "wrong"?," Journal of International Money and Finance, Elsevier, vol. 27(8), pages 1407-1419, December.
  8. Maria Demertzis, 2006. "The role of expectations in monetary policy," DNB Working Papers 118, Netherlands Central Bank, Research Department.
  9. Maria Demertzis, 2009. "The 'Wisdom of the Crowds' and Public Policy," DNB Working Papers 203, Netherlands Central Bank, Research Department.
  10. Demertzis, Maria & Hughes Hallett, Andrew, 2005. "Forming Rational Expectations and When it is Right to be 'Wrong'," CEPR Discussion Papers 5042, C.E.P.R. Discussion Papers.

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