Optimal government transparency

This paper studies the economic conditions under which a government chooses to disseminate information among its creditors. The government receives private information about economic output and provides public information, either implicitly by the actions it takes, or explicitly by communicating the true value of output. In a dynamic model of endogenous sovereign default, I find that the government prefers to be more transparent when it has lower debt, expects a lower drop in output, and the probability of receiving a low output is higher. A higher probability of a recession lowers the bond price and brings the optimal borrowing to a level where a transparent government can repay even if it receives a low output. Hence, higher borrowing costs, due to higher default risk, make the government to choose more transparency. The result is supported by empirical evidence for OECD. I find that an increase in borrowing cost (proxy for increase in likelihood of recession) by 1% is associated with a future increase in information transparency by 6%.