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Transparency: can central banks commit to truthful communication?

  • Julian A. Parra-Polania

    ()

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 REPÚBLICA in its series BORRADORES DE ECONOMIA with number 009614.

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Length: 26
Date of creation: 28 May 2012
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Handle: RePEc:col:000094:009614
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  1. Carboni, Giacomo & Ellison, Martin, 2011. "Inflation and output volatility under asymmetric incomplete information," Journal of Economic Dynamics and Control, Elsevier, vol. 35(1), pages 40-51, January.
  2. Geraats, Petra M, 2000. "Why Adopt Transparency? The Publication of Central Bank Forecasts," CEPR Discussion Papers 2582, C.E.P.R. Discussion Papers.
  3. Maria Demertzis & Andrew Hughes Hallett, 2004. "Central bank transparency in theory and practice," Money Macro and Finance (MMF) Research Group Conference 2003 23, Money Macro and Finance Research Group.
  4. Sebastián Gómez Barrero & Julián Parra Polanía, 2011. "Comportamiento estratégico de los bancos centrales al anunciar pronósticos de inflación," BORRADORES DE ECONOMIA 008576, BANCO DE LA REPÚBLICA.
  5. Stein, Jeremy C, 1989. "Cheap Talk and the Fed: A Theory of Imprecise Policy Announcements," American Economic Review, American Economic Association, vol. 79(1), pages 32-42, March.
  6. Laskar, Daniel, 2010. "Central bank transparency and shocks," Economics Letters, Elsevier, vol. 107(2), pages 158-160, May.
  7. Jensen, Henrik, 2002. " Optimal Degrees of Transparency in Monetary Policymaking," Scandinavian Journal of Economics, Wiley Blackwell, vol. 104(3), pages 399-422, September.
  8. Marie Hoerova & Cyril Monnet & Ted Temzelides, 2009. "Money talks," Working Papers 09-18, Federal Reserve Bank of Philadelphia.
  9. Garfinkel, Michelle R. & Oh, Seonghwan, 1995. "When and how much to talk credibility and flexibility in monetary policy with private information," Journal of Monetary Economics, Elsevier, vol. 35(2), pages 341-357, April.
  10. Matthew B. Canzoneri, 1983. "Monetary policy games and the role of private information," International Finance Discussion Papers 249, Board of Governors of the Federal Reserve System (U.S.).
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  12. Geraats, P.M., 2005. "The Mystique of Central Bank Speak," Cambridge Working Papers in Economics 0543, Faculty of Economics, University of Cambridge.
  13. Eijffinger, Sylvester & Tesfaselassie, Mewael F., 2007. "Central Bank forecasts and disclosure policy: Why it pays to be optimistic," European Journal of Political Economy, Elsevier, vol. 23(1), pages 30-50, March.
  14. Carl E. Walsh, 2007. "Optimal Economic Transparency," International Journal of Central Banking, International Journal of Central Banking, vol. 3(1), pages 5-36, March.
  15. Kydland, Finn E & Prescott, Edward C, 1977. "Rules Rather Than Discretion: The Inconsistency of Optimal Plans," Journal of Political Economy, University of Chicago Press, vol. 85(3), pages 473-91, June.
  16. Tarkka, Juha & Mayes, David, 1999. "The Value of Publishing Official Central Bank Forecasts," Research Discussion Papers 22/1999, Bank of Finland.
  17. Lars E. O. Svensson, 2006. "Social Value of Public Information: Comment: Morris and Shin (2002) Is Actually Pro-Transparency, Not Con," American Economic Review, American Economic Association, vol. 96(1), pages 448-452, March.
  18. Hans Gersbach, 2003. "On the negative social value of central banks' knowledge transparency," Economics of Governance, Springer, vol. 4(2), pages 91-102, 08.
  19. Mahadeva, Lavan & Sterne, Gabriel, 2002. "Inflation Targets as a Stabilization Device," Manchester School, University of Manchester, vol. 70(4), pages 619-50, Special I.
  20. Walsh, Carl E, 1999. "Announcements, Inflation Targeting and Central Bank Incentives," Economica, London School of Economics and Political Science, vol. 66(262), pages 255-69, May.
  21. Nergiz Dincer & Barry Eichengreen, 2009. "Central Bank Transparency: Causes, Consequences and Updates," NBER Working Papers 14791, National Bureau of Economic Research, Inc.
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  23. Barro, Robert J & Gordon, David B, 1983. "A Positive Theory of Monetary Policy in a Natural Rate Model," Journal of Political Economy, University of Chicago Press, vol. 91(4), pages 589-610, August.
  24. Geraats, P.M., 2004. "Transparency and Reputation: The Publication of Central Bank Forecasts," Cambridge Working Papers in Economics 0473, Faculty of Economics, University of Cambridge.
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