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The relationship between central bank transparency and the quality of inflation forecasts: is it U-shaped?

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  • Emna Trabelsi

Abstract

A recent theoretical literature highlighted the potential dangers of further increasing information disclosure by central banks. This paper gives a continuous empirical investigation of the existence of an optimal degree of transparency in the lines of van der Cruijsen et al. We test a quadratic relationship between central bank transparency and the inflation persistence by introducing some technical and economic modifications. Particularly, we used three new measures of transparency. An appropriate U shape test that was made through a Stata routine, recently developed by Lind and Mehlum, indicates a robust optimal intermediate degree of transparency, but its level is not. These results were obtained using a panel of 11 OECD central banks under the period 1999-2009. The estimations were run using a bias corrected LSDVC, a newly recent technique developed by Bruno for short dynamic panels with fixed effects, extended to accommodate unbalanced data.

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Paper provided by Economics and Econometrics Research Institute (EERI), Brussels in its series EERI Research Paper Series with number EERI_RP_2012_02.

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Date of creation: 02 Jan 2012
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Handle: RePEc:eei:rpaper:eeri_rp_2012_02

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Keywords: Intermediate optimal transparency degree; inflation forecasts; inflation persistence; u-shaped relationship; non linear modeling; LSDVC; Principal Component Analysis.;

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  1. Forte, Antonio, 2009. "The European Central Bank, the Federal Reserve and the Bank of England: is the Taylor Rule an useful benchmark for the last decade?," MPRA Paper 18309, University Library of Munich, Germany.
  2. Daniel Kahneman, 2003. "Maps of Bounded Rationality: Psychology for Behavioral Economics," American Economic Review, American Economic Association, vol. 93(5), pages 1449-1475, December.
  3. Petra M. Geraats, 2002. "Central Bank Transparency," Economic Journal, Royal Economic Society, vol. 112(483), pages 532-565, November.
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