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The Impact of Central Bank Transparency on Inflation Expectations

Author

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  • Carin van der Cruijsen
  • Maria Demertzis

Abstract

In contrast to previous empirical attempts to examine the effect of increasing central bank transparency on macroeconomic magnitudes, we investigate how the link between inflation and inflation expectations alters with increasing transparency. Our motivation stems from the belief that changes in the institutional features or operations of the Central Bank affect, first and foremost, the way that private agents form their expectations about the future behaviour of the Central Bank, and only through them, inflation. We apply the framework used by Levin et al (2004) who differentiate between inflation targeters and countries that do not have explicit quantitative objectives. They discover that inflation targeters benefit from a weaker link between inflation and expectations, and the more so for longer horizons. We, in turn, examine whether this observation still holds as central banks become more transparent. Our attempt is facilitated by the recent development of quantitative measures for transparency, used in the main text. We find that our results provide some evidence to substantiate the beneficial impact of transparency, on helping fix private sector expectations.

Suggested Citation

  • Carin van der Cruijsen & Maria Demertzis, 2005. "The Impact of Central Bank Transparency on Inflation Expectations," DNB Working Papers 031, Netherlands Central Bank, Research Department.
  • Handle: RePEc:dnb:dnbwpp:031
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    References listed on IDEAS

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    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. Geraats, P. & Eijffinger, S.C.W. & van der Cruijsen, C.A.B., 2006. "Does Central Bank Transparancy Reduce Interest Rates?," Discussion Paper 2006-11, Tilburg University, Center for Economic Research.
    3. Faust, Jon & Svensson, Lars E O, 2002. "The Equilibrium Degree of Transparency and Control in Monetary Policy," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 34(2), pages 520-539, May.
    4. Bruce E. Hansen, 1999. "The Grid Bootstrap And The Autoregressive Model," The Review of Economics and Statistics, MIT Press, vol. 81(4), pages 594-607, November.
    5. Eijffinger, Sylvester C.W. & Geraats, Petra M., 2006. "How transparent are central banks?," European Journal of Political Economy, Elsevier, vol. 22(1), pages 1-21, March.
    6. Georgios Chortareas & David Stasavage & Gabriel Sterne, 2003. "Does monetary policy transparency reduce disinflation costs?," Manchester School, University of Manchester, vol. 71(5), pages 521-540, September.
    7. Muller, P. & M. Zelmer, 1999. "Greater Transparency in Monetary Policy: Impact on Financial Markets," Technical Reports 86, Bank of Canada.
    8. Georgios Chortareas & David Stasavage & Gabriel Sterne, 2002. "Does it pay to be transparent? international evidence form central bank forecasts," Review, Federal Reserve Bank of St. Louis, issue Jul, pages 99-118.
    9. Willem H. Buiter, 1999. "Alice in Euroland," Journal of Common Market Studies, Wiley Blackwell, vol. 37(2), pages 181-209, June.
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    12. Alan S. Blinder, 2000. "Central-Bank Credibility: Why Do We Care? How Do We Build It?," American Economic Review, American Economic Association, vol. 90(5), pages 1421-1431, December.
    13. Geraats, Petra M., 2000. "Why Adopt Transparency? The Publication of Central Bank Forecasts," Center for International and Development Economics Research, Working Paper Series qt0hw7h7cp, Center for International and Development Economics Research, Institute for Business and Economic Research, UC Berkeley.
    14. King, Mervyn, 1997. "Changes in UK monetary policy: Rules and discretion in practice," Journal of Monetary Economics, Elsevier, vol. 39(1), pages 81-97, June.
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    16. Jakob Haan & Fabian Amtenbrink & Sandra Waller, 2004. "The Transparency and Credibility of the European Central Bank," Journal of Common Market Studies, Wiley Blackwell, vol. 42(4), pages 775-794, November.
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    18. Siklos,Pierre L., 2006. "The Changing Face of Central Banking," Cambridge Books, Cambridge University Press, number 9780521034494, October.
    19. Petra M. Geraats, 2002. "Central Bank Transparency," Economic Journal, Royal Economic Society, vol. 112(483), pages 532-565, November.
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    More about this item

    Keywords

    Central Bank Transparency; Infl; ation Expectations; Monetary Policy;

    JEL classification:

    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • 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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