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Does Central Bank Transparency Matter for Economic Stability

  • Stefano Eusepi

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

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Paper provided by Society for Computational Economics in its series Computing in Economics and Finance 2004 with number 176.

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Date of creation: 11 Aug 2004
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Handle: RePEc:sce:scecf4:176
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  1. Preston, Bruce, 2006. "Adaptive learning, forecast-based instrument rules and monetary policy," Journal of Monetary Economics, Elsevier, vol. 53(3), pages 507-535, April.
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  4. Benhabib, Jess & Schmitt-Grohé, Stephanie & Uribe, Martín, 1999. "The Perils of Taylor Rules," CEPR Discussion Papers 2314, C.E.P.R. Discussion Papers.
  5. James B. Bullard & Stefano Eusepi, 2004. "Did the Great Inflation occur despite policymaker commitment to a Taylor rule?," Working Papers 2003-013, Federal Reserve Bank of St. Louis.
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  10. Athanasios Orphanides, 2001. "Monetary policy rules, macroeconomic stability and inflation: a view from the trenches," Finance and Economics Discussion Series 2001-62, Board of Governors of the Federal Reserve System (U.S.).
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  16. Seppo Honkapohja & Kaushik Mitra, 2002. "Learning Stability in Economies with Heterogenous Agents," CESifo Working Paper Series 772, CESifo Group Munich.
  17. Jean Boivin & Marc P. Giannoni, 2003. "Has Monetary Policy Become More Effective?," NBER Working Papers 9459, National Bureau of Economic Research, Inc.
  18. Marc P. Giannoni & Michael Woodford, 2003. "Optimal Interest-Rate Rules: II. Applications," Levine's Bibliography 506439000000000394, UCLA Department of Economics.
  19. James Bullard, 1991. "Learning equilibria," Working Papers 1991-004, Federal Reserve Bank of St. Louis.
  20. Bullard, James & Mitra, Kaushik, 2002. "Learning about monetary policy rules," Journal of Monetary Economics, Elsevier, vol. 49(6), pages 1105-1129, September.
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