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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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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. James Bullard, 1991. "Learning equilibria," Working Papers 1991-004, Federal Reserve Bank of St. Louis.
  2. Jon Faust & Lars E.O. Svensson, 1999. "The Equilibrium Degree of Transparency and Control in Monetary Policy," NBER Working Papers 7152, National Bureau of Economic Research, Inc.
  3. Faust, Jon & Svensson, Lars E O, 2001. "Transparency and Credibility: Monetary Policy with Unobservable Goals," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 42(2), pages 369-97, May.
  4. Bennett T. McCallum, 2003. "Multiple-Solution Indeterminacies in Monetary Policy Analysis," NBER Working Papers 9837, National Bureau of Economic Research, Inc.
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  8. Evans, George W & Honkapohja, Seppo, 2001. "Expectations and the Stability Problem for Optimal Monetary Policies," CEPR Discussion Papers 2805, C.E.P.R. Discussion Papers.
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  10. Jean Boivin & Marc P. Giannoni, 2006. "Has Monetary Policy Become More Effective?," The Review of Economics and Statistics, MIT Press, vol. 88(3), pages 445-462, August.
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  16. Marvin Goodfriend, 1985. "Monetary mystique : secrecy and central banking," Working Paper 85-07, Federal Reserve Bank of Richmond.
  17. James Bullard & Stefano Eusepi, 2003. "Did the Great Inflation Occur Despite Policymaker Commitment to a Taylor Rule?," Computing in Economics and Finance 2003 129, Society for Computational Economics.
  18. Alexei Onatski, 2000. "Minimax Analysis of Monetary Policy Under Model Uncertainty," Econometric Society World Congress 2000 Contributed Papers 1818, Econometric Society.
  19. Marcet, Albert & Sargent, Thomas J., 1989. "Convergence of least squares learning mechanisms in self-referential linear stochastic models," Journal of Economic Theory, Elsevier, vol. 48(2), pages 337-368, August.
  20. Preston, Bruce, 2006. "Adaptive learning, forecast-based instrument rules and monetary policy," Journal of Monetary Economics, Elsevier, vol. 53(3), pages 507-535, April.
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Cited by:
  1. Benhabib, Jess & Eusepi, Stefano, 2005. "The design of monetary and fiscal policy: A global perspective," Journal of Economic Theory, Elsevier, vol. 123(1), pages 40-73, July.
  2. Stefano Eusepi, 2005. "Central bank transparency under model uncertainty," Staff Reports 199, Federal Reserve Bank of New York.

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