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Three Models of Imperfect Transparency in Monetary Policy

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  • Demertzis, Maria
  • Hughes Hallett, Andrew

Abstract

We present three different models of imperfect transparency in monetary policy: political transparency, economic transparency and constructive ambiguity. The first two show that transparency reduces the variability of inflation and the output gap but does not affect their average levels. But if the Central Bank is unable to commit to one particular set of preferences for all circumstances, in line with the hypothesis of constructive ambiguity, we find that both the levels and the variability of output and inflation may be affected. An empirical examination of these predictions, based on an index recently constructed by Eijffinger and Geraats, shows that macroeconomic averages are not much affected by transparency. But transparency appears to reduce the variability of inflation while increasing the variability of output. That suggests that Central Banks may have been exploiting constructive ambiguity more than a lack of transparency.

Suggested Citation

  • Demertzis, Maria & Hughes Hallett, Andrew, 2003. "Three Models of Imperfect Transparency in Monetary Policy," CEPR Discussion Papers 4117, C.E.P.R. Discussion Papers.
  • Handle: RePEc:cpr:ceprdp:4117
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    References listed on IDEAS

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    Cited by:

    1. Demertzis, Maria & Hughes Hallett, Andrew, 2007. "Central Bank transparency in theory and practice," Journal of Macroeconomics, Elsevier, vol. 29(4), pages 760-789, December.
    2. Dai, Meixing & Sidiropoulos, Moise, 2008. "Fiscal Policy in a Monetary Union in the Presence of Uncertainty about the Central Bank Preferences," MPRA Paper 13907, University Library of Munich, Germany, revised Mar 2009.
    3. Maria Demertzis & Andrew Hughes Hallet, 2004. "Rational Ambiguity and Monitoring the Central Bank," WO Research Memoranda (discontinued) 759, Netherlands Central Bank, Research Department.
    4. Dai, Meixing & Sidiropoulos, Moïse, 2008. "Central bank's conservativeness and transparency," Research in Economics, Elsevier, vol. 62(4), pages 179-187, December.
    5. Buigut, Steven & Valev, Neven T., 2009. "Benefits from Mutual Restraint in a Multilateral Monetary Union," World Development, Elsevier, vol. 37(3), pages 585-594, March.
    6. Jan Libich, 2006. "Inflexibility Of Inflation Targeting Revisited: Modeling The "Anchoring" Effect," CAMA Working Papers 2006-02, Centre for Applied Macroeconomic Analysis, Crawford School of Public Policy, The Australian National University.
    7. Carsten Hefeker, 2011. "Policy Uncertainty and Economic Reforms in a Monetary Union," German Economic Review, Verein für Socialpolitik, vol. 12(3), pages 274-285, August.

    More about this item

    Keywords

    ambiguity; imperfect transparency; independent monetary policies; rational inattention;

    JEL classification:

    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies

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