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Does Central Bank Transparency Matter for Economic Stability

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  • Stefano Eusepi

Abstract

This paper studies the impact of monetary policy transparency on economic stability, when economic agents are boundedly rational. I first consider a simple class of microfunded general equilibrium models with nominal rigidities and learning. Under a transparent monetary regime, market participants have information about how monetary policy is conducted and use it when forming their forecasts. The paper shows that under plausible assumptions about the model environment, a transparent implementation of simple policy rules improves stability under learning dynamics. It is also shown that, independently of the degree of central bank transparency, the Taylor Principle is generally not sufficient to guarantee robustness of the rational expectations equilibrium to expectational mistakes by the central bank or the private sector. The paper also attempts an evaluation of the benefits of transparency using a calibrated model of US data

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Bibliographic Info

Paper provided by Society for Computational Economics in its series Computing in Economics and Finance 2004 with number 176.

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Date of creation: 11 Aug 2004
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Handle: RePEc:sce:scecf4:176

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Keywords: learnability; inflation targeting; simple feedback rules; endogenous fluctuations;

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  1. Bennett T. McCallum, 1997. "Issues in the Design of Monetary Policy Rules," NBER Working Papers 6016, National Bureau of Economic Research, Inc.
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Cited by:
  1. Stefano Eusepi, 2005. "Central bank transparency under model uncertainty," Staff Reports 199, Federal Reserve Bank of New York.
  2. Stefano Eusepi & Jess Benhabib, 2005. "The Design of Monetary and Fiscal Policy: A Global Perspective," Computing in Economics and Finance 2005 388, Society for Computational Economics.

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