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The Costs of Increasing Transparency

  • Maria Demertzis


  • Marco Hoeberichts


In their seminal paper, Morris and Shin (Amer Econ Rev 92(5): 1521–1534, 2002a ) argued that increasing the precision of public information is not always beneficial to social welfare. Svensson (Amer Econ Rev 96: 448–451, 2006 ) however has disputed this by saying that although feasible, the conditions for which this was true, were not all that likely. In that respect, therefore, increasing ‘transparency’ remains most of the times beneficial to social welfare. In this paper, we extend the Morris and Shin attempt by setting it up as an explicit interactive game between the Central Bank, the objectives of which we model explicitly, and the private sector. We show that in the absence of costs, both players benefit from transparency in the manner described previously in the literature, and point the differences in their gains. Following that, we then introduce the fact that increasing transparency comes at some costs and show how both players face incentives to free ride on each other as a result. The presence of costs thus alters the way in which greater transparency is attained. Copyright Springer Science+Business Media, LLC 2007

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Article provided by Springer in its journal Open Economies Review.

Volume (Year): 18 (2007)
Issue (Month): 3 (July)
Pages: 263-280

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Handle: RePEc:kap:openec:v:18:y:2007:i:3:p:263-280
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  1. Michael Woodford, 2001. "Imperfect Common Knowledge and the Effects of Monetary Policy," NBER Working Papers 8673, National Bureau of Economic Research, Inc.
  2. Hyun Song Shin & Jeffery D. Amato, 2003. "Public and Private Information in Monetary Policy Models," Computing in Economics and Finance 2003 38, Society for Computational Economics.
  3. Maria Demertzis & Nicola Viegi, 2005. "Inflation Targets as Focal Points," Money Macro and Finance (MMF) Research Group Conference 2005 52, Money Macro and Finance Research Group.
  4. Antonio Fatas & Ilian Mihov & Andrew K. Rose, 2004. "Quantitative Goals for Monetary Policy," NBER Working Papers 10846, National Bureau of Economic Research, Inc.
  5. Jeffery Amato & Stephen Morris & Hyun Song Shin, 2003. "Communication and Monetary Policy," Levine's Working Paper Archive 506439000000000330, David K. Levine.
  6. Orphanides, Athanasios & Williams, John C., 2004. "The decline of activist stabilization policy: Natural rate misperceptions, learning, and expectations," CFS Working Paper Series 2004/24, Center for Financial Studies (CFS).
  7. George-Marios Angeletos & Alessandro Pavan, 2004. "Transparency of Information and Coordination in Economies with Investment Complementarities," Discussion Papers 1494, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
  8. Stephen Morris & Hyun Song Shin, 2000. "Global Games: Theory and Applications," Cowles Foundation Discussion Papers 1275R, Cowles Foundation for Research in Economics, Yale University, revised Aug 2001.
  9. Stephen Morris & Hyun Song Shin, 2002. "Social Value of Public Information," American Economic Review, American Economic Association, vol. 92(5), pages 1521-1534, December.
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