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Social value of public information: testing the limits to transparency

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  • Ehrmann, Michael
  • Fratzscher, Marcel

Abstract

Transparency has become an almost universal virtue among central banks. The paper tests empirically, for the case of the Federal Reserve, two hypotheses about central bank transparency derived from the debate of Morris and Shin (2002) and Svensson (2006). First, the paper finds that the precision of communication is a key determinant of the predictability of both FOMC decisions as well as the future policy path. Second, the effectiveness of communication is found to depend on the market environment. Specifically, a given statement may enhance predictability in an environment of high market uncertainty, but may reduce it when uncertainty is low. The findings underline the limits to transparency and stress the need for communication to be flexible and adjust to market conditions in order for central banks to achieve their ultimate objectives. JEL Classification: E52, E58, D82

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Bibliographic Info

Paper provided by European Central Bank in its series Working Paper Series with number 0821.

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Date of creation: Oct 2007
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Handle: RePEc:ecb:ecbwps:20070821

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Postal: Press and Information Division, European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany
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Related research

Keywords: communication; effectiveness; Federal Reserve; monetary policy; Predictability; transparency;

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Cited by:
  1. M.H. Middeldorp, 2011. "FOMC Communication Policy and the Accuracy of Fed Funds Futures," Working Papers 11-13, Utrecht School of Economics.
  2. Christopher W. Crowe & Ellen E. Meade, 2008. "Central Bank Independence and Transparency," IMF Working Papers 08/119, International Monetary Fund.
  3. Menno Middeldorp, 2011. "Central Bank Transparency, the Accuracy of Professional Forecasts, and Interest Rate Volatility," Working Papers 11-12, Utrecht School of Economics.
  4. Jan Filáček & Branislav Saxa, 2012. "Central Bank Forecasts as a Coordination Device: Evidence from the Czech Republic," Czech Economic Review, Charles University Prague, Faculty of Social Sciences, Institute of Economic Studies, vol. 6(3), pages 244-264, October.
  5. Alan S. Blinder & Michael Ehrmann & Marcel Fratzscher & Jakob De Haan & David-Jan Jansen, 2008. "Central Bank Communication and Monetary Policy: A Survey of Theory and Evidence," Journal of Economic Literature, American Economic Association, vol. 46(4), pages 910-45, December.
  6. Trabelsi, Emna, 2010. "Central bank communication: fragmentation as an engine for limiting the publicity degree of information," MPRA Paper 26647, University Library of Munich, Germany.
  7. Crowe, Christopher & Meade, Ellen E., 2008. "Central bank independence and transparency: Evolution and effectiveness," European Journal of Political Economy, Elsevier, vol. 24(4), pages 763-777, December.
  8. Selva Demiralp & Hakan Kara & Pinar Ozlu, 2011. "Monetary Policy Communication Under Inflation Targeting : Do Words Speak Louder Than Actions?," Working Papers 1118, Research and Monetary Policy Department, Central Bank of the Republic of Turkey.
  9. David-Jan Jansen, 2008. "Has the Clarity of Humphrey-Hawkins Testimonies Affected Volatility in Financial Markets?," DNB Working Papers 185, Netherlands Central Bank, Research Department.
  10. 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.

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