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Greater Transparency in Monetary Policy: Impact on Financial Markets

  • Muller, P.
  • M. Zelmer
Registered author(s):

    Measures have been taken by the Bank of Canada to increase the transparency of Canadian monetary policy. This paper examines whether the greater transparency has improved financial markets’ understanding of the conduct of monetary policy. In theory, it should result in reduced conditional uncertainty because investor expectations would be formed with a superior information set. The market’s response to releases of the Bank of Canada’s Monetary Policy Report and to changes in the Bank’s operating band for the overnight interest rate is examined. The empirical results suggest that the Bank’s efforts at increasing transparency appear to have helped market participants anticipate pending monetary policy actions. Indeed, the amount of uncertainty that surrounds the Bank’s actions is now broadly consistent with that reported for other major countries. The issue of whether there should be limits on the amount of transparency in the conduct of monetary policy is also explored. The paper concludes that there is possibly some merit in the Bank’s providing more frequent information on its economic outlook and highlighting the uncertainty that surrounds the Bank’s views. However, the paper argues against publishing the detailed results of the Bank’s economic projections. It also notes that the element of surprise can be useful on occasion with respect to the Bank’s operations in financial markets.

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    File URL: http://www.bankofcanada.ca/en/res/tr/1999/tr86.pdf
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    Paper provided by Bank of Canada in its series Technical Reports with number 86.

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    Length: 39 pages
    Date of creation: 1999
    Date of revision:
    Handle: RePEc:bca:bocatr:86
    Contact details of provider: Postal: 234 Wellington Street, Ottawa, Ontario, K1A 0G9, Canada
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    Web page: http://www.bank-banque-canada.ca/

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    1. Marvin Goodfriend, 1985. "Monetary mystique : secrecy and central banking," Working Paper 85-07, Federal Reserve Bank of Richmond.
    2. Serge Boisvert & Nancy Harvey, 1998. "The declining supply of treasury bills and the Canadian money market," Bank of Canada Review, Bank of Canada, vol. 1998(Summer), pages 53-69.
    3. Armstrong, John & Black, Richard & Laxton, Douglas & Rose, David, 1998. "A robust method for simulating forward-looking models," Journal of Economic Dynamics and Control, Elsevier, vol. 22(4), pages 489-501, April.
    4. Guido Tabellini, 1986. "Secrecy of Monetary Policy and the Variability of Interest Rates," UCLA Economics Working Papers 426, UCLA Department of Economics.
    5. LeRoy, Stephen F & Porter, Richard D, 1981. "The Present-Value Relation: Tests Based on Implied Variance Bounds," Econometrica, Econometric Society, vol. 49(3), pages 555-74, May.
    6. repec:imf:imfpdp:9802 is not listed on IDEAS
    7. Alain Paquet & Thierry Perez, 1993. "La réaction du marché financier face à différentes sources de signal de la politique monétaire au Canada," Cahiers de recherche CREFE / CREFE Working Papers 11, CREFE, Université du Québec à Montréal.
    8. Rudin, Jeremy R., 1988. "Central bank secrecy, `fed watching', and the predictability of interest rates," Journal of Monetary Economics, Elsevier, vol. 22(2), pages 317-334, September.
    9. Andrew G Haldane, 1997. "Designing Inflation Targets," RBA Annual Conference Volume, in: Philip Lowe (ed.), Monetary Policy and Inflation Targeting Reserve Bank of Australia.
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