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Are Contemporary Central Banks Transparent about Economic Models and Objectives and What Difference Does it Make?

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Cukierman, Alex

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Abstract

This paper documents the opaqueness of central banks about the economic models they use to choose policy but argues that this is largely due to the lack of consensus about the correct model of the economy within the economic profession. The latter is illustrated by contrasting three currently popular models of the transmission mechanism. Although the inflation targets of Western central banks are currently quite clear they tend to be hazy about their output targets and about whether they are strictor flexible inflation targeters (in Svensson's (1997) sense), and in the second case, how flexible. They are remarkably silent about the shape of their loss function in the entire range of output gaps. The second part of the paper first reviews the case for believing that at least some central banks are, given inflation, more averse to negative than to positive output gaps and then investigates the consequences of this asymmetry for average inflation. It is shown, for both an expactations augmented Phillips curve as well as for a New -Keynesian transmission mechanism, that in the presence of uncertainty about the upcoming state of the economy flexible inflation targeters with assymetric objectives induce an onflation bias even if their output target is the potential level. Furtehrmore the inflationary tendencies of policymakers who believe in sticky prices are stronger than of those who do not. But, provided prices are really in sticky, the economy is non neutral even in the long run, and the policies of the former also induce a higher level of output. The consequences of transparency about those mechanisms for credibility are evaluated. Dieses Papier zeigt zunächst, dass Notenbanken hinsichtlich des Modells, das sie ihrer Politik zugrundelegen, Stillschweigen wahren. Es wird weiterhin argumentiert, dass dies daran liegt, dass sich die Volkswirte über das richtige Modell nicht einig sind. Dazu werden 3 verbreitete Modelle des Transmissionsprozesses einander gegenübergestellt. Währende die Inflationsziele westlicher Zentralbanken recht klar sind, besteht größere Unsicherheit über ihre Outputziele und darüber, ob sie ihr Inflationsziel strikt oder flexibel (und gegebenenfalls wie flexibel) anstreben (im Sinne von Svensson, 1997). Zentralbanken sind auch bezüglich der Form ihrer Verlustfunktion verschwiegen, insbesondere was die Output-Lücke angeht. Dies gilt, obwohl in einer unsicheren Welt Politikentscheidungen von der Form der Verlustfunktion abhängen. Der zweite Teil des Papiers geht zunächst auf den Fall ein dass zumindestens einige Zentralbanken, bei gegebener Inflation eine größere Abneigung gegenüber negativen als gegenüber positiven Output-Lücken haben. Die Folgen dieser Assymetrie für die durchschnittliche Inflation werden untersucht. Sowohl bei einer erwartungsabhängigen Phillipskurve als auch bei einem Neo-Keynesianischen Transmissionsmechanismus haben Zentralbanken mit einer flexiblen Inflationsrate und einer asymmetrischen Zielfunktion mit einem Inflationsbias zu tun. Das gilt selbst wenn das Outputziel mit dem Produktionspotential übereinstimm. Zudem sind die Inflationstendenzen höher wnn Wirtschaftspolitiker daran glauben, dass sich die Preise nur allmählich an ihr Gleichgewicht anpassen, als wenn sie solche Vorstellungen nicht hätten. Wenn allerdings solche Vorstellungen über die Preise tatsächlich zutreffen, dann ist Geld auch langfristig nicht neutral. die Politiker vom ersten Typ ermöglcihen dann ein höheres Output-Niveau. Es wird geprüft, welche Folgen es für die Glaubwürdigkeit hat, wenn für Transparenz über diese Mechanismen gesorgt wird.

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Paper provided by Deutsche Bundesbank, Research Centre in its series Discussion Paper Series 1: Economic Studies with number 2001,05.

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Date of creation: 2001
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Handle: RePEc:zbw:bubdp1:4151

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References listed on IDEAS
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  5. Jon Faust & Lars E.O. Svensson, 1998. "Transparency and credibility: monetary policy with unobservable goals," International Finance Discussion Papers 605, Board of Governors of the Federal Reserve System (U.S.). [Downloadable!]
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  6. Barro, Robert J & Gordon, David B, 1983. "A Positive Theory of Monetary Policy in a Natural Rate Model," Journal of Political Economy, University of Chicago Press, vol. 91(4), pages 589-610, August. [Downloadable!] (restricted)
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  7. Glenn Rudebusch, 2000. "Assessing Nominal Income Rules for Monetary Policy with Model and Data Uncertainty," Econometric Society World Congress 2000 Contributed Papers 0065, Econometric Society. [Downloadable!]
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  11. Dolado, Juan J. & María-Dolores, Ramón & Naveira Barrero, Manuel, 2000. "Asymmetries In Monetary Policy Rules: Evidence For Four Central Banks," CEPR Discussion Papers 2441, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
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  17. Bernhard Winkler, 2000. "Which kind of transparency? On the need for clarity in monetary policy-making," Working Paper Series 26, European Central Bank. [Downloadable!]
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  1. Geraats, P.M., 2004. "Transparency and Reputation: The Publication of Central Bank Forecasts," Cambridge Working Papers in Economics 0473, Faculty of Economics, University of Cambridge. [Downloadable!]
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  2. Xavier Debrun & Manmohan S. Kumar, 2007. "The Discipline-Enhancing Role of Fiscal Institutions: Theory and Empirical Evidence," IMF Working Papers 07/171, International Monetary Fund. [Downloadable!]
  3. Mariusz Jarmuzek & Lucjan T. Orlowski & Artur Radziwill, 2005. "Monetary Policy Transparency in the Inflation Targeting," Macroeconomics 0502025, EconWPA. [Downloadable!]
  4. Paolo Surico, 2003. "Measuring the time-inconsitency of US monetary policy," Working Paper Series 291, European Central Bank. [Downloadable!]
    Other versions:
  5. W.H. Verhagen & S.C.W. Eijffinger, 2001. "Flexible Inflation Targeting under a Non-Linear Phillipscurve," WO Research Memoranda (discontinued) 663, Netherlands Central Bank, Research Department. [Downloadable!]
    Other versions:
  6. Elke Muchlinski, 2005. "The Lucas Critique and Keynes Response.Considering the History of Macroeconomics," Macroeconomics 0503019, EconWPA. [Downloadable!]
  7. Alex Cukierman & Anton Muscatelli, 2001. "Do Central Banks have Precautionary Demands for Expansions and for Price Stability?," Working Papers 2002_4, Department of Economics, University of Glasgow, revised Mar 2002. [Downloadable!]
  8. Manuel M F Martins & Alvaro Aguiar, 2005. "Testing for Asymmetries in the Preferences of the Euro-Area Monetary Policymaker," Money Macro and Finance (MMF) Research Group Conference 2005 41, Money Macro and Finance Research Group. [Downloadable!]
  9. W.H. Verhagen, 2002. "Interest Rate Stepping, Interest Rate Smoothing and Uncertainty: Some Views from the Literature," WO Research Memoranda (discontinued) 683, Netherlands Central Bank, Research Department. [Downloadable!]
  10. Wasim Shahid Malik & Musleh-ud Din, 2008. "Monetary Policy Transparency in Pakistan: An Independent Analysis," PIDE-Working Papers 2008:44, Pakistan Institute of Development Economics. [Downloadable!]
  11. Meixing DAI & Eleftherios SPYROMITROS, 2007. "Walsh’s Contract and Transparency about Central Bank Preferences for Robust Control," Working Papers of BETA 2007-30, Bureau d'Economie Théorique et Appliquée, ULP, Strasbourg. [Downloadable!]
  12. Geraats, P.M, 2005. "Transparency of Monetary Policy: Theory and Practice," Cambridge Working Papers in Economics 0549, Faculty of Economics, University of Cambridge. [Downloadable!]
    Other versions:
  13. Paolo Surico, 2004. "Inflation Targeting and Nonlinear Policy Rules: The Case of Asymmetric Preferences," CESifo Working Paper Series CESifo Working Paper No. , CESifo GmbH. [Downloadable!]
    Other versions:
  14. Viktor Kotlan & David Navratil, 2003. "Inflation Targeting as a Stabilisation Tool: Its Design and Performance in the Czech Republic," Macroeconomics 0310006, EconWPA. [Downloadable!]
  15. Romain Baeriswyl & Camille Cornand, 2007. "Monetary policy and its informative value," Proceedings, Federal Reserve Bank of San Francisco. [Downloadable!]
  16. Alex Cukierman & Anton Muscatelli, 2008. "Nonlinear Taylor Rules and Asymmetric Preferences in Central Banking: Evidence from the United Kingdom and the United States," Contributions to Macroeconomics, Berkeley Electronic Press, vol. 8(1), pages 1488-1488. [Downloadable!] (restricted)
  17. Eijffinger, Sylvester C W & van der Cruijsen, Carin A B, 2007. "The Economic Impact of Central Bank Transparency: A Survey," CEPR Discussion Papers 6070, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
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  18. Seth B. Carpenter, 2004. "Transparency and monetary policy: what does the academic literature tell policymakers?," Finance and Economics Discussion Series 2004-35, Board of Governors of the Federal Reserve System (U.S.). [Downloadable!]
  19. Georgios Chortareas & David Stasavage & Gabriel Sterne, . "Does it pay to be transparent? International evidence from central bank forecasts," Bank of England working papers 143, Bank of England. [Downloadable!]
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  20. Alvaro Aguiar & Manuel M. F. Martins, 2005. "Testing for Asymmetries in the Preferences of the Euro-Area Monetary Policymaker," FEP Working Papers 182, Universidade do Porto, Faculdade de Economia do Porto. [Downloadable!]
  21. Cukierman, Alex & Gerlach, Stefan, 2003. "The Inflation Bias Revisited: Theory and Some International Evidence," CEPR Discussion Papers 3761, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
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  22. Daniel L. Thornton, 2003. "Monetary policy transparency: transparent about what?," Working Papers 2002-028, Federal Reserve Bank of St. Louis. [Downloadable!]
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  23. Cukierman, Alex & Muscatelli, V. Anton, 2002. "Do Central Banks have Precautionary Demands for Expansions and for Price Stability? -- Theory and Evidence," CESifo Working Paper Series CESifo Working Paper No. , CESifo GmbH. [Downloadable!]
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