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Central Bank Transparency: A Market Indicator

  • Peter Howells

    ()

    (School of Economics, University of the West of England)

  • Iris Biefang-Frisancho Mariscal

    (School of Economics, University of the West of England)

It is widely believed that monetary policy outcomes are generally enhanced if the conduct of policy by the central bank is widely understood by other agents in the economy. This widespread belief has given rise to a number of attempts to measure the ‘transparency’ of monetary policy in various regimes. Unsurprisingly, the degree of transparency depends upon a variety of institutional arrangements peculiar to each monetary regime. Thus, the dominant approach to measurement relies upon identifying a range of legal and other formal characteristics - in a manner very reminiscent of the central bank independence literature of fifteen years ago. This approach is not entirely satisfactory, however, since it is agents’ perceptions of the degree of transparency that matters if transparency is to have any effect on policy outcomes. This has given rise to other methods of measurement which survey the views of agents. While this is potentially more relevant, it is obviously possible that their statements may differ from their actions. This paper takes a different approach which is to look at the extent to which money market interest rates anticipate central bank announcements of changes in policy rate in the case of the Bank of England (post-1997), the ECB and the (ex-) Bundesbank. In contrast with earlier studies which all claim to find significant (but not consistent) differences between the degree of transparency in each of these regimes, evidence from money market behaviour suggests that the degree of transparency is comparable across all three.

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File URL: http://carecon.org.uk/DPs/0305.pdf
File Function: First version, 2003
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Paper provided by Department of Accounting, Economics and Finance, Bristol Business School, University of the West of England, Bristol in its series Working Papers with number 0305.

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Length: 23 pages
Date of creation: May 2003
Date of revision:
Handle: RePEc:uwe:wpaper:0305
Contact details of provider: Postal: 0117 328 3610
Phone: 0117 328 3610
Web page: http://www1.uwe.ac.uk/bl/research/bristoleconomics.aspx

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  1. Michael Woodford, 2001. "Monetary Policy in the Information Economy," NBER Working Papers 8674, National Bureau of Economic Research, Inc.
  2. Claudio E. V. Borio, 1997. "Monetary policy operating procedures in industrial countries," BIS Working Papers 40, Bank for International Settlements.
  3. Otmar Issing, 2001. "The EURO Area and the single monetary policy," Working Papers 44, Oesterreichische Nationalbank (Austrian Central Bank).
  4. Daniel L. Thornton, 2003. "Monetary policy transparency: transparent about what?," Working Papers 2002-028, Federal Reserve Bank of St. Louis.
  5. Heffernan, Shelagh A, 1997. "Modelling British Interest Rate Adjustment: An Error Correction Approach," Economica, London School of Economics and Political Science, vol. 64(254), pages 211-31, May.
  6. Kydland, Finn E & Prescott, Edward C, 1977. "Rules Rather Than Discretion: The Inconsistency of Optimal Plans," Journal of Political Economy, University of Chicago Press, vol. 85(3), pages 473-91, June.
  7. Sargent, Thomas J & Wallace, Neil, 1975. ""Rational" Expectations, the Optimal Monetary Instrument, and the Optimal Money Supply Rule," Journal of Political Economy, University of Chicago Press, vol. 83(2), pages 241-54, April.
  8. Sargent, Thomas J. & Wallace, Neil, 1976. "Rational expectations and the theory of economic policy," Journal of Monetary Economics, Elsevier, vol. 2(2), pages 169-183, April.
  9. Alesina, Alberto & Summers, Lawrence H, 1993. "Central Bank Independence and Macroeconomic Performance: Some Comparative Evidence," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 25(2), pages 151-62, May.
  10. Mark Toma, 2001. "Monetary policy," Chapters, in: The Elgar Companion to Public Choice, chapter 21 Edward Elgar.
  11. Issing, Otmar, 2001. "The Euro Area and the Single Monetary Policy," International Journal of Finance & Economics, John Wiley & Sons, Ltd., vol. 6(4), pages 277-88, October.
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