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Does Central Bank Transparency Matter for Economic Stability

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  • Stefano Eusepi

Abstract

This paper studies the impact of monetary policy transparency on economic stability, when economic agents are boundedly rational. I first consider a simple class of microfunded general equilibrium models with nominal rigidities and learning. Under a transparent monetary regime, market participants have information about how monetary policy is conducted and use it when forming their forecasts. The paper shows that under plausible assumptions about the model environment, a transparent implementation of simple policy rules improves stability under learning dynamics. It is also shown that, independently of the degree of central bank transparency, the Taylor Principle is generally not sufficient to guarantee robustness of the rational expectations equilibrium to expectational mistakes by the central bank or the private sector. The paper also attempts an evaluation of the benefits of transparency using a calibrated model of US data

Suggested Citation

  • Stefano Eusepi, 2004. "Does Central Bank Transparency Matter for Economic Stability," Computing in Economics and Finance 2004 176, Society for Computational Economics.
  • Handle: RePEc:sce:scecf4:176
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    Cited by:

    1. Benhabib, Jess & Eusepi, Stefano, 2005. "The design of monetary and fiscal policy: A global perspective," Journal of Economic Theory, Elsevier, vol. 123(1), pages 40-73, July.
    2. Stefano Eusepi, 2005. "Central bank transparency under model uncertainty," Staff Reports 199, Federal Reserve Bank of New York.

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    More about this item

    Keywords

    learnability; inflation targeting; simple feedback rules; endogenous fluctuations;
    All these keywords.

    JEL classification:

    • D83 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Search; Learning; Information and Knowledge; Communication; Belief; Unawareness
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies
    • E3 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles

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