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Does Central Bank Transparency Reduce Interest Rates?

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Listed author(s):
  • Petra M. Geraats
  • Sylvester C.W. Eijffinger
  • Carin A.B. van der Cruijsen

Abstract

Central banks have become increasingly transparent during the last decade. One of the main benefits of transparency predicted by theoreticalmodels is that it enhances the credibility, reputation, and flexibility of monetary policy, which suggests that increased transparency should result in lower nominal interest rates. This paper exploits a detailed transparency data set to investigate this relationship for eight major central banks. It appears that for all central banks, the level of interest rates is affected by the degree of central bank transparency. In particular, the majority of the improvements in transparency are associated with significant effects on interest rates, controlling for economic conditions. In most of these cases, interest rates are lower, often by around 50 basis points, although in some instances transparency appears to have had a detrimental e¤ect on interest rates.

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Paper provided by Netherlands Central Bank, Research Department in its series DNB Working Papers with number 085.

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Date of creation: Feb 2006
Handle: RePEc:dnb:dnbwpp:085
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Keywords: central bank transparency; monetary policy; interest rates.;

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Find related papers by 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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  1. 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.
  2. 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.
  3. Andrew G Haldane & Vicky Read, 2000. "Monetary policy surprises and the yield curve," Bank of England working papers 106, Bank of England.
  4. Matthew Rafferty & Marc Tomljanovich, 2002. "Central bank transparency and market efficiency: An econometric analysis," Journal of Economics and Finance, Springer;Academy of Economics and Finance, vol. 26(2), pages 150-161, June.
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  6. Siklos, Pierre L., 2000. "Monetary policy transparency, public commentary, and market perceptions about monetary policy in Canada," Discussion Paper Series 1: Economic Studies 2000,08, Deutsche Bundesbank, Research Centre.
  7. 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.
  8. White, Halbert, 1980. "A Heteroskedasticity-Consistent Covariance Matrix Estimator and a Direct Test for Heteroskedasticity," Econometrica, Econometric Society, vol. 48(4), pages 817-838, May.
  9. Jensen, Henrik, 2002. " Optimal Degrees of Transparency in Monetary Policymaking," Scandinavian Journal of Economics, Wiley Blackwell, vol. 104(3), pages 399-422, September.
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  11. 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.
  12. Lorenzo Bini-Smaghi & Daniel Gros, 2001. "Is the ECB Sufficiently Accountable and Transparent?," Economics Working Papers 007, European Network of Economic Policy Research Institutes.
  13. Petra Gerlach-Kristen, 2004. "Is the MPC's Voting Record Informative about Future UK Monetary Policy?," Scandinavian Journal of Economics, Wiley Blackwell, vol. 106(2), pages 299-313, 06.
  14. Muller, P. & M. Zelmer, 1999. "Greater Transparency in Monetary Policy: Impact on Financial Markets," Technical Reports 86, Bank of Canada.
  15. Rachel Reeves & Michael Sawicki, 2005. "Do financial markets react to Bank of England communication?," Discussion Papers 15, Monetary Policy Committee Unit, Bank of England.
  16. Hendry, David F., 1995. "Dynamic Econometrics," OUP Catalogue, Oxford University Press, number 9780198283164.
  17. Cukierman, A., 2000. "Accountability, Credibility, Transparency and Stabilization Policy in the Eurosystem," Papers 2000-4, Tel Aviv.
  18. Engle, Robert F, 1982. "Autoregressive Conditional Heteroscedasticity with Estimates of the Variance of United Kingdom Inflation," Econometrica, Econometric Society, vol. 50(4), pages 987-1007, July.
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