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Can Central Bank Transparency Go Too Far?

  • Frederic S. Mishkin

This paper asks the question: can central bank transparency go too far? Transparency is beneficial only when it serves to simplify communication with the public and helps generate support for central banks to conduct monetary policy optimally with an appropriate focus on long-run objectives. This paper argues that some suggestions for increased transparency, particularly a central bank announcement of its objective function or projections of the path of the policy interest rate, will complicate the communication process and weaken support for a central bank focus on long-run objectives. Transparency can indeed go too far. However, central banks can improve transparency in discussing that they do care about reducing output fluctuations . By describing procedures for how the path and horizon of inflation targets would be modified in the face of large shocks, by emphasizing that monetary policy will be just as vigilant in preventing inflation from falling too low as it is from preventing it from being too high, and by indicating that the central bank will pursue expansionary policies when output falls very far below potential, central banks can show that they do care about output fluctuations. These steps to improve transparency will increase support for the central bank's policies and independence, but avoid a focus on the short run that could interfere with the ability of the central bank to do its job effectively.

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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 10829.

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Date of creation: Oct 2004
Date of revision:
Publication status: published as Frederic S Mishkin, 2004. "Can Central Bank Transparency Go Too Far?," RBA Annual Conference Volume, in: Christopher Kent & Simon Guttmann (ed.), The Future of Inflation Targeting Reserve Bank of Australia.
Handle: RePEc:nbr:nberwo:10829
Note: ME
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