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Optimal Central Bank Transparency

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Author Info
Carin A.B. van der Cruijsen
Sylvester C.W. Eijffinger
Lex H. Hoogduin

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Abstract

Should central banks increase their degree of transparency any further? We show that there is likely to be an optimal intermediate degree of central bank transparency. Up to thisoptimum more transparency is desirable: it improves the quality of private sector inflation forecasts. But beyond the optimum people might: (1) start to attach too much weight tothe conditionality of their forecasts, and/or (2) get confused by the large and increasing amount of information they receive. This deteriorates the (perceived) quality of privatesector inflation forecasts. Inflation then is set in a more backward looking manner resulting in higher inflation persistence. By using a panel data set on the transparency of 100 centralbanks we find empirical support for an optimal intermediate degree of transparency at which inflation persistence is minimized. Our results indicate that while there are central banksthat would benefit from further transparency increases, some might already have reached the limit.

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Paper provided by Netherlands Central Bank, Research Department in its series DNB Working Papers with number 178.

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Date of creation: Jul 2008
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Handle: RePEc:dnb:dnbwpp:178

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Related research
Keywords: central bank transparency; monetary policy; inflation persistence.;

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Find related papers by JEL classification:
E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
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

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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.:
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  2. Eijffinger, Sylvester C.W. & Geraats, Petra M., 2006. "How transparent are central banks?," European Journal of Political Economy, Elsevier, vol. 22(1), pages 1-21, March. [Downloadable!] (restricted)
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  3. Maria Demertzis & Marco Hoeberichts, 2006. "The Costs of Increasing Transparency," DNB Working Papers 080, Netherlands Central Bank, Research Department. [Downloadable!]
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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. Dai, Meixing & Sidiropoulos, Moïse & Spyromitros, Eleftherios, 2008. "Monetary policy transparency and inflation persistence in a small open economy," MPRA Paper 13829, University Library of Munich, Germany, revised Mar 2009. [Downloadable!]
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