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Central bank transparency under the cost channel

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  • Meixing Dai

    (BETA - Bureau d'Économie Théorique et Appliquée - UL - Université de Lorraine - UNISTRA - Université de Strasbourg - INRA - Institut National de la Recherche Agronomique - CNRS - Centre National de la Recherche Scientifique)

  • Qiao Zhang

    (BETA - Bureau d'Économie Théorique et Appliquée - UL - Université de Lorraine - UNISTRA - Université de Strasbourg - INRA - Institut National de la Recherche Agronomique - CNRS - Centre National de la Recherche Scientifique)

Abstract

This paper studies the implications of information disclosure about the central bank's preferences regarding inflation and output‐gap stabilization in the presence of the cost channel of monetary transmission. Through this channel, higher interest rates translate into higher marginal costs of production and, finally, into higher inflation. Conventional wisdom has it that whether the central bank is transparent alters the effects of cost‐push or supply shocks, but does not change the fact that demand shocks are fully offset by optimal monetary policy. We show that this view is incorrect in the presence of a cost channel, since the latter not only affects how transparency interacts with cost‐push shocks, but also makes it interact with demand shocks. Moreover, the desirability of full transparency when shocks are persistent is significantly reduced by the presence of the cost channel.

Suggested Citation

  • Meixing Dai & Qiao Zhang, 2017. "Central bank transparency under the cost channel," Post-Print hal-02166805, HAL.
  • Handle: RePEc:hal:journl:hal-02166805
    DOI: 10.1111/infi.12107
    Note: View the original document on HAL open archive server: https://hal.univ-lorraine.fr/hal-02166805
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