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Transparency: can central banks commit to truthful communication?

  • Julian A. Parra POlanía

    ()

To evaluate whether transparency is beneficial, it is usual to assume that the central bank may choose one of two options, opacity versus truthful communication. However, the monetary policymaker may have incentives to misrepresent private information so as to reduce economic volatility by manipulating inflation expectations. Using a standard model, this paper points out the fact that if misrepresentation is included as a possible action there is no rational expectations equilibrium with inflation announcements. Therefore, even if transparency is preferred over secrecy the central bank cannot credibly commit to truth-telling, in contrast to what is commonly assumed in the literature on transparency.

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Paper provided by Banco de la Republica de Colombia in its series Borradores de Economia with number 711.

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Length: 26
Date of creation: May 2012
Date of revision:
Handle: RePEc:bdr:borrec:711
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  1. M. Demertzis & A. Hughes Hallet, 2002. "Central Bank Transparency in Theory and Practice," WO Research Memoranda (discontinued) 704, Netherlands Central Bank, Research Department.
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  9. Sebastián Gómez Barrero & Julián Parra Polanía, 2011. "Comportamiento estratégico de los bancos centrales al anunciar pronósticos de inflación," BORRADORES DE ECONOMIA 008577, BANCO DE LA REPÚBLICA.
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