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The Role of Central Bank Transparency for Guiding Private Sector Forecasts

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  • Michael Ehrmann
  • Sylvester Eijffinger
  • Marcel Fratzscher

Abstract

There is a broad consensus in the literature that costs of information processing and acquisition may generate costly disagreements in expectations among economic agents, and that central banks may play a central role in reducing such dispersion in expectations. This paper analyses empirically whether enhanced central bank transparency lowers dispersion among professional forecasters of key economic variables, using a large set of proxies for central bank transparency in 12 advanced economies. It finds evidence for a significant and sizeable effect of central bank transparency on forecast dispersion, be it by means of announcing a quantified inflation objective, other forms of communication, or by publishing central banks? inflation and output forecasts. However, there also appear to be limits to central bank transparency, with decreasing marginal returns to enhancing (economic) transparency, and given our findings that disagreement among inflation expectations in the general public is not affected by the various central bank transparency measures analyzed in this paper.
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Suggested Citation

  • Michael Ehrmann & Sylvester Eijffinger & Marcel Fratzscher, 2012. "The Role of Central Bank Transparency for Guiding Private Sector Forecasts," Scandinavian Journal of Economics, Wiley Blackwell, vol. 114(3), pages 1018-1052, September.
    • Handle: RePEc:bla:scandj:v:114:y:2012:i:3:p:1018-1052
    DOI: j.1467-9442.2012.01706.x
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    JEL classification:

    • C53 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Forecasting and Prediction Models; Simulation Methods
    • E37 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Forecasting and Simulation: Models and Applications
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy

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