The limits of transparency

This paper probes the limits of transparency in monetary policymaking along two dimensions: feasibility and desirability. It argues that even central banks that are considered champions of openness are not very clear about their measures of the output gap and about their beliefs regarding the effects of policy on inflationary expectations. This is due mainly to limited knowledge about the economy. It implies that feasibility constraints on transparency are more serious than stylized models of the transmission mechanism would imply. In addition no central bank has made clear statements about its objective function, including in particular the relative weight on output versus inflation stabilization, the policy discount factor and the shape of losses from the inflation and the output gaps over the possible ranges of realizations of those variables. Through discussion of the reasons for this, the paper probes some of the feasibility constraints on transparency. ; The second part of the paper abstracts from feasibility constraints and discusses the desirable levels of openness in various areas of the policymaking process like the bank?s objective function, the bank?s output target, forecasts of economic shocks, disagreements within the CB board, the bank?s own ignorance and, last but not least, private signals about impending problems in parts of the financial system. The paper distinguishes between areas in which full transparency is desirable from areas in which intermediate levels are desirable.