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The impact of central bank transparency on inflation expectations

  • van der Cruijsen, Carin
  • Demertzis, Maria

In contrast to previous empirical attempts to examine the effect of increasing central bank transparency on macroeconomic magnitudes, we investigate how the link between inflation and inflation expectations alters with increasing transparency. Our motivation stems from the belief that changes in the institutional features or operations of the Central Bank affect, first and foremost, the way that private agents form their expectations about the future behaviour of the Central Bank, and only through them, inflation. We apply the framework used by Levin et al (2004) who differentiate between inflation targeters and countries that do not have explicit quantitative objectives. They discover that inflation targeters benefit from a weaker link between inflation and expectations, and the more so for longer horizons. We, in turn, examine whether this observation still holds as central banks become more transparent. Our attempt is facilitated by the recent development of quantitative measures for transparency, used in the main text. We find that our results provide some evidence to substantiate the beneficial impact of transparency, on helping fix private sector expectations.

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Article provided by Elsevier in its journal European Journal of Political Economy.

Volume (Year): 23 (2007)
Issue (Month): 1 (March)
Pages: 51-66

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Handle: RePEc:eee:poleco:v:23:y:2007:i:1:p:51-66
Contact details of provider: Web page: http://www.elsevier.com/locate/inca/505544

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  1. repec:ner:tilbur:urn:nbn:nl:ui:12-178750 is not listed on IDEAS
  2. 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.
  3. Petra M. Geraats, 2001. "Why Adopt Transparency? The Publication of Central Bank Forecasts," Macroeconomics 0012011, EconWPA.
  4. Petra M. Geraats & Sylvester C.W. Eijffinger & Carin A.B. van der Cruijsen, 2006. "Does Central Bank Transparency Reduce Interest Rates?," DNB Working Papers 085, Netherlands Central Bank, Research Department.
  5. Maria Demertzis & Andrew Hughes Hallet, 2003. "Central Bank Transparency in Theory and Practice," DNB Staff Reports (discontinued) 105, Netherlands Central Bank.
  6. King, Mervyn, 1997. "Changes in UK monetary policy: Rules and discretion in practice," Journal of Monetary Economics, Elsevier, vol. 39(1), pages 81-97, June.
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  9. Willem H. Buiter, 1999. "Alice in Euroland," LSE Research Online Documents on Economics 20226, London School of Economics and Political Science, LSE Library.
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  16. Jensen, Henrik, 2001. "Optimal Degrees of Transparency in Monetary Policymaking," CEPR Discussion Papers 2689, C.E.P.R. Discussion Papers.
  17. Frederic S. Mishkin & Adam S. Posen, 1997. "Inflation targeting: lessons from four countries," Economic Policy Review, Federal Reserve Bank of New York, issue Aug, pages 9-110.
  18. Andrew T. Levin & Fabio M. Natalucci & Jeremy M. Piger, 2004. "The macroeconomic effects of inflation targeting," Review, Federal Reserve Bank of St. Louis, issue Jul, pages 51-80.
  19. Roy Batchelor, 2001. "How useful are the forecasts of intergovernmental agencies? The IMF and OECD versus the consensus," Applied Economics, Taylor & Francis Journals, vol. 33(2), pages 225-235.
  20. Muller, P. & M. Zelmer, 1999. "Greater Transparency in Monetary Policy: Impact on Financial Markets," Technical Reports 86, Bank of Canada.
  21. 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.
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