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The Impact of Central Bank Transparency on Inflation Expectations

  • Carin van der Cruijsen
  • Maria Demertzis

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.

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Paper provided by Netherlands Central Bank, Research Department in its series DNB Working Papers with number 031.

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Date of creation: Mar 2005
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Handle: RePEc:dnb:dnbwpp:031
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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, Petra M., 2001. "Why adopt transparency? The publication of central bank forecasts," Working Paper Series 0041, European Central Bank.
  3. Jensen, Henrik, 2001. "Optimal Degrees of Transparency in Monetary Policymaking," CEPR Discussion Papers 2689, C.E.P.R. Discussion Papers.
  4. Jon Faust & Lars E.O. Svensson, 1999. "The Equilibrium Degree of Transparency and Control in Monetary Policy," NBER Working Papers 7152, National Bureau of Economic Research, Inc.
  5. Eijffinger, S.C.W. & Geraats, P.M., 2004. "How Transparent Are Central Banks?," Cambridge Working Papers in Economics 0411, Faculty of Economics, University of Cambridge.
  6. W.H. Buiter, 1999. "Alice in Euroland," CEP Discussion Papers dp0423, Centre for Economic Performance, LSE.
  7. 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.
  8. 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, 09.
  9. Alan S. Blinder, 1999. "Central Bank Credibility: Why Do We Care? How Do We Build It?," NBER Working Papers 7161, National Bureau of Economic Research, Inc.
  10. Frederic S. Mishkin & Adam S. Posen, 1997. "Inflation targeting: lessons from four countries," Economic Policy Review, Federal Reserve Bank of New York, issue Aug, pages 9-110.
  11. Hansen,B.E., 1998. "The grid bootstrap and the autoregressive model," Working papers 26, Wisconsin Madison - Social Systems.
  12. Stock, James H., 1991. "Confidence intervals for the largest autoregressive root in U.S. macroeconomic time series," Journal of Monetary Economics, Elsevier, vol. 28(3), pages 435-459, December.
  13. Muller, P. & M. Zelmer, 1999. "Greater Transparency in Monetary Policy: Impact on Financial Markets," Technical Reports 86, Bank of Canada.
  14. 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.
  15. Roy Batchelor, 2001. "How useful are the forecasts of intergovernmental agencies? The IMF and OECD versus the consensus," Applied Economics, Taylor & Francis Journals, vol. 33(2), pages 225-235.
  16. Petra M. Geraats, 2002. "Central Bank Transparency," Economic Journal, Royal Economic Society, vol. 112(483), pages 532-565, November.
  17. Andrew T. Levin & Fabio M. Natalucci & Jeremy M. Piger, 2004. "The macroeconomic effects of inflation targeting," Review, Federal Reserve Bank of St. Louis, issue Jul, pages 51-80.
  18. Jonathan Coppel & Ellis Connolly, 2003. "What Do Financial Market Data Tell Us about Monetary Policy Transparency?," RBA Research Discussion Papers rdp2003-05, Reserve Bank of Australia.
  19. 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.
  20. 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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