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Central bank transparency under model uncertainty

  • Stefano Eusepi

This paper explores the effects of central bank transparency on the performance of optimal inflation targeting rules. I assume that both the central bank and the private sector face uncertainty about the "correct" model of the economy and have to learn. A transparent central bank can reduce one source of uncertainty for private agents by communicating its policy rule to the public. ; The paper shows that central bank transparency plays a crucial role in stabilizing the agents' learning process and expectations. By contrast, lack of transparency can lead to expectations-driven fluctuations that have destabilizing effects on the economy, even when the central bank has adopted optimal policies.

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Paper provided by Federal Reserve Bank of New York in its series Staff Reports with number 199.

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Date of creation: 2005
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Handle: RePEc:fip:fednsr:199
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  25. Adam, Klaus & Evans, George W. & Honkapohja, Seppo, 2003. "Are stationary hyperinflation paths learnable?," CFS Working Paper Series 2004/15, Center for Financial Studies (CFS).
  26. Stefano Eusepi, 2004. "Does Central Bank Transparency Matter for Economic Stability," Computing in Economics and Finance 2004 176, Society for Computational Economics.
  27. Jess Benhabib & Stephanie Schmitt-Grohe & Martin Uribe, 1999. "Monetary Policy and Multiple Equilibria," Departmental Working Papers 199914, Rutgers University, Department of Economics.
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  29. Kaushik Mitra & James Bullard, 2004. "Determinacy, Learnability, and Monetary Policy Inertia," Royal Holloway, University of London: Discussion Papers in Economics 04/14, Department of Economics, Royal Holloway University of London, revised Jul 2004.
  30. Petra M. Geraats, 2002. "Central Bank Transparency," Economic Journal, Royal Economic Society, vol. 112(483), pages 532-565, November.
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  32. 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.
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