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Central Bank Transparency, the Accuracy of Professional Forecasts, and Interest Rate Volatility

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  • M. Middeldorp

Abstract

Central banks worldwide have become more transparent. An important reason is that democratic societies expect more openness from public institutions. Policymakers also see transparency as a way to improve the predictability of monetary policy, thereby lowering interest rate volatility and contributing to economic stability. Most empirical studies support this view. However, there are three reasons why more research is needed. First, some (mostly theoretical) work suggests that transparency has an adverse effect on predictability. Second, empirical studies have mostly focused on average predictability before and after specific reforms in a small set of advanced economies. Third, less is known about the effect on interest rate volatility. To extend the literature, I use the Dincer and Eichengreen (2007) transparency index for twenty-four economies of varying income and examine the impact of transparency on both predictability and market volatility. I find that higher transparency improves the accuracy of interest rate forecasts for three months ahead and reduces rate volatility.

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  • M. Middeldorp, 2011. "Central Bank Transparency, the Accuracy of Professional Forecasts, and Interest Rate Volatility," Working Papers 11-12, Utrecht School of Economics.
  • Handle: RePEc:use:tkiwps:1112
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    Cited by:

    1. Thomas Lustenberger & Enzo Rossi, 2020. "Does Central Bank Transparency and Communication Affect Financial and Macroeconomic Forecasts?," International Journal of Central Banking, International Journal of Central Banking, vol. 16(2), pages 153-201, March.
    2. Belke, Ansgar, 2017. "Central bank communication: Managing expectations through the monetary dialogue," Ruhr Economic Papers 692, RWI - Leibniz-Institut für Wirtschaftsforschung, Ruhr-University Bochum, TU Dortmund University, University of Duisburg-Essen.
    3. Belke Ansgar, 2013. "Non-Standard Monetary Policy Measures – Magic Wand or Tiger by the Tail?," Review of Economics, De Gruyter, vol. 64(3), pages 341-368, December.
    4. Clemens J. M. Kool & Daniel L. Thornton, 2015. "How Effective Is Central Bank Forward Guidance?," Review, Federal Reserve Bank of St. Louis, vol. 97(4), pages 303-322.
    5. Rhee, Hyuk Jae & Turdaliev, Nurlan, 2013. "Central bank transparency: Does it matter?," International Review of Economics & Finance, Elsevier, vol. 27(C), pages 183-197.
    6. Ansgar Belke, 2013. "Non-Standard Monetary Policy Measures – Magic Wand or Tiger by the Tail?," Ruhr Economic Papers 0447, Rheinisch-Westfälisches Institut für Wirtschaftsforschung, Ruhr-Universität Bochum, Universität Dortmund, Universität Duisburg-Essen.
    7. Miah, Fazlul & Khalifa, Ahmed Ali & Hammoudeh, Shawkat, 2016. "Further evidence on the rationality of interest rate expectations: A comprehensive study of developed and emerging economies," Economic Modelling, Elsevier, vol. 54(C), pages 574-590.
    8. Mihaela Simionescu, 2014. "A Comparative Analysis Of Real And Predicted Inflation Convergence In Cee Countries During The Economic Crisis," CES Working Papers, Centre for European Studies, Alexandru Ioan Cuza University, vol. 6(2), pages 142-155, July.
    9. Anna Florio, 2016. "The central bank as shaper and observer of events: The case of the yield spread," Canadian Journal of Economics, Canadian Economics Association, vol. 49(1), pages 320-346, February.
    10. Ma, Yong & Li, Shushu, 2015. "Bayesian estimation of China's monetary policy transparency: A New Keynesian approach," Economic Modelling, Elsevier, vol. 45(C), pages 236-248.
    11. repec:zbw:rwirep:0447 is not listed on IDEAS
    12. Anna Florio, 2016. "The central bank as shaper and observer of events: The case of the yield spread," Canadian Journal of Economics/Revue canadienne d'économique, John Wiley & Sons, vol. 49(1), pages 320-346, February.
    13. Eichler, Stefan & Littke, Helge C.N. & Tonzer, Lena, 2017. "Central bank transparency and cross-border banking," Journal of International Money and Finance, Elsevier, vol. 74(C), pages 1-30.
    14. Trabelsi, Emna, 2016. "Central bank transparency and the consensus forecast: What does The Economist poll of forecasters tell us?," Research in International Business and Finance, Elsevier, vol. 38(C), pages 338-359.
    15. Anna Naszodi & Csaba Csavas & Daniel Felcser, 2016. "Which Aspects of Central Bank Transparency Matter? A Comprehensive Analysis of the Effect of Transparency of Survey Forecasts," International Journal of Central Banking, International Journal of Central Banking, vol. 12(4), pages 147-192, December.
    16. repec:hal:wpaper:hal-01121434 is not listed on IDEAS
    17. Akosah, Nana & Alagidede, Paul & Schaling, Eric, 2019. "Monetary Policy Transparency in Ghana: Recent Evidence," MPRA Paper 96998, University Library of Munich, Germany.
    18. Runchana Pongsaparn & Panda Ketruangroch & Dhanaporn Hirunwong, 2012. "Monetary Policy conduct in Review: The Appropriate Choice of Instruments," Working Papers 2012-05, Monetary Policy Group, Bank of Thailand.

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    Keywords

    Central bank communication; interest rate forecasts; central bank transparency; financial market efficiency;
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