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ECB Credibility and Transparency

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  • Petra M. Geraats

Abstract

This paper argues that ECB credibility in delivering price stability is being progressively eroded; this problem could be overcome by embracing greater transparency especially about the ECB's objectives, macroeconomic forecasts and decision-making. During the ECB's first decade, average inflation in the euro area has been low, but it has failed to meet the ECB's criterion of below but close to 2% over the medium term. Although this could be attributed to unanticipated shocks, the analysis in this paper points to some structural shortcomings. In particular, there has been an upward trend in medium and long term inflation expectations in the euro area, which have even reached over 2%, and the credibility of the ECB achieving price stability in the medium term has gradually eroded to critically low levels. In addition, there is evidence that medium and long term inflation expectations are negatively affected by the inflation experience of the euro area. However, this paper argues that these problems could be overcome embracing by greater transparency, especially about the ECB's objectives, macroeconomic forecasts and decision-making.

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Bibliographic Info

Paper provided by Directorate General Economic and Monetary Affairs (DG ECFIN), European Commission in its series European Economy - Economic Papers with number 330.

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Length: 33 pages
Date of creation: Jun 2008
Date of revision:
Handle: RePEc:euf:ecopap:0330

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Keywords: ECB; monetary policy; inflation expectations; Geraats;

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References

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  1. Fagan, Gabriel & Henry, Jérôme & Mestre, Ricardo, 2001. "An area-wide model (AWM) for the euro area," Working Paper Series 0042, European Central Bank.
  2. Ehrmann, Michael & Fratzscher, Marcel, 2005. "Communication and decision-making by central bank committees: different strategies, same effectiveness?," Working Paper Series 0488, European Central Bank.
  3. Geraats Petra M., 2005. "Transparency and Reputation: The Publication of Central Bank Forecasts," The B.E. Journal of Macroeconomics, De Gruyter, vol. 5(1), pages 1-28, February.
  4. Willem H. Buiter, 1999. "Alice in Euroland," Journal of Common Market Studies, Wiley Blackwell, vol. 37(2), pages 181-209, 06.
  5. Georgios Chortareas & David Stasavage & Gabriel Sterne, 2001. "Does it pay to be transparent? International evidence from central bank forecasts," Bank of England working papers 143, Bank of England.
  6. Carlos Bowles & Roberta Friz & Veronique Genre & Geoff Kenny & Aidan Meyler & Tuomas Rautanen, 2007. "The ECB survey of professional forecasters (SPF) – A review after eight years’ experience," Occasional Paper Series 59, European Central Bank.
  7. Gersbach, Hans & Hahn, Volker, 2005. "Voting Transparency in a Monetary Union," CEPR Discussion Papers 5155, C.E.P.R. Discussion Papers.
  8. van der Cruijsen, Carin & Demertzis, Maria, 2007. "The impact of central bank transparency on inflation expectations," European Journal of Political Economy, Elsevier, vol. 23(1), pages 51-66, March.
  9. Geraats, P.M, 2005. "Transparency of Monetary Policy: Theory and Practice," Cambridge Working Papers in Economics 0549, Faculty of Economics, University of Cambridge.
  10. Bernard Laurens & Martin Sommer & Marco Arnone & Jean-François Segalotto, 2007. "Central Bank Autonomy," IMF Working Papers 07/88, International Monetary Fund.
  11. N. Nergiz Dincer & Barry Eichengreen, 2007. "Central Bank Transparency: Where, Why, and with What Effects?," NBER Working Papers 13003, National Bureau of Economic Research, Inc.
  12. Eijffinger, Sylvester C W & Geraats, Petra M, 2002. "How Transparent are Central Banks?," CEPR Discussion Papers 3188, C.E.P.R. Discussion Papers.
  13. Stephen Morris & Hyun Song Shin, 2005. "Central Bank Transparency and the Signal Value of Prices," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 36(2), pages 1-66.
  14. Petra M. Geraats, 2002. "Central Bank Transparency," Economic Journal, Royal Economic Society, vol. 112(483), pages 532-565, November.
  15. Michael Ehrmann & Marcel Fratzscher, 2009. "Explaining Monetary Policy in Press Conferences," International Journal of Central Banking, International Journal of Central Banking, vol. 5(2), pages 42-84, June.
  16. Petra Gerlach-Kristen, 2004. "Is the MPC's Voting Record Informative about Future UK Monetary Policy?," Scandinavian Journal of Economics, Wiley Blackwell, vol. 106(2), pages 299-313, 06.
  17. Georgios Chortareas & David Stasavage & Gabriel Sterne, 2003. "Does monetary policy transparency reduce disinflation costs?," Manchester School, University of Manchester, vol. 71(5), pages 521-540, 09.
  18. Marco Arnone & Bernard J Laurens & Jean-Fran�ois Segalotto & Martin Sommer, 2009. "Central Bank Autonomy: Lessons from Global Trends," IMF Staff Papers, Palgrave Macmillan, vol. 56(2), pages 263-296, June.
  19. Stephen Morris & Hyun Song Shin, 2002. "Social Value of Public Information," American Economic Review, American Economic Association, vol. 92(5), pages 1521-1534, December.
  20. Leitemo, Kai, 2003. " Targeting Inflation by Constant-Interest-Rate Forecasts," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 35(4), pages 609-26, August.
  21. Otmar Issing, 1999. "The Eurosystem: Transparent andAccountable or 'Willem in Euroland'," Journal of Common Market Studies, Wiley Blackwell, vol. 37(3), pages 503-519, 09.
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Cited by:
  1. Klaus Schmidt-Hebbel, 2012. "Fiscal Institutions in Resource-Rich Economies: Lessons from Chile and Norway," Documentos de Trabajo 416, Instituto de Economia. Pontificia Universidad Católica de Chile..
  2. Zsolt Darvas & Valentina Kostyleva, 2011. "Fiscal and Monetary Institutions in Central, Eastern and South-Eastern European Countries," Working Papers 1102, Department of Mathematical Economics and Economic Analysis, Corvinus University of Budapest.
  3. Zsolt Darvas & Valentina Kostyleva, 2011. "The fiscal and monetary institutions of CESEE countries," Working Papers 494, Bruegel.
  4. Klaus Schmidt-Hebbel, 2012. "Fiscal Policy for Commodity Exporting Countries: Chile's Experience," Documentos de Trabajo 415, Instituto de Economia. Pontificia Universidad Católica de Chile..

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