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Optimal Central Bank Transparency

  • Carin A.B. van der Cruijsen
  • Sylvester C.W. Eijffinger
  • Lex H. Hoogduin

Should central banks increase their degree of transparency any further? We show that there is likely to be an optimal intermediate degree of central bank transparency. Up to thisoptimum more transparency is desirable: it improves the quality of private sector inflation forecasts. But beyond the optimum people might: (1) start to attach too much weight tothe conditionality of their forecasts, and/or (2) get confused by the large and increasing amount of information they receive. This deteriorates the (perceived) quality of privatesector inflation forecasts. Inflation then is set in a more backward looking manner resulting in higher inflation persistence. By using a panel data set on the transparency of 100 centralbanks we find empirical support for an optimal intermediate degree of transparency at which inflation persistence is minimized. Our results indicate that while there are central banksthat would benefit from further transparency increases, some might already have reached the limit.

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Paper provided by Netherlands Central Bank, Research Department in its series DNB Working Papers with number 178.

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Date of creation: Jul 2008
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Handle: RePEc:dnb:dnbwpp:178
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