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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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File URL: http://hdl.handle.net/10.1007/s11079-007-9037-5
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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
Contact details of provider: Web page: http://www.springerlink.com/link.asp?id=100323

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  1. 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.
  2. Hyun Song Shin & Jeffery D. Amato, 2003. "Public and private information in monetary policy models," BIS Working Papers 138, Bank for International Settlements.
  3. Athanasios Orphanides & John C. Williams, 2003. "The decline of activist stabilization policy: natural rate misperceptions, learning, and expectations," Proceedings, Board of Governors of the Federal Reserve System (U.S.).
  4. George-Marios Angeletos & Alessandro Pavan, 2004. "Transparency of Information and Coordination in Economies with Investment Complementarities," NBER Working Papers 10391, National Bureau of Economic Research, Inc.
  5. Jeffery D. Amato & Hyun Song Shin & Stephen Morris, 2003. "Communication and monetary policy," BIS Working Papers 123, Bank for International Settlements.
  6. Stephen Morris & Hyun Song Shin, 2002. "Social Value of Public Information," American Economic Review, American Economic Association, vol. 92(5), pages 1521-1534, December.
  7. 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.
  8. Fatás, Antonio & Mihov, Ilian & Rose, Andrew K, 2004. "Quantitative Goals for Monetary Policy," CEPR Discussion Papers 4445, C.E.P.R. Discussion Papers.
  9. Michael Woodford, 2001. "Imperfect Common Knowledge and the Effects of Monetary Policy," NBER Working Papers 8673, National Bureau of Economic Research, Inc.
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