Economic transparency and effectiveness of monetary policy

Abstract

PurposeThe purpose of this paper is to study if the central bank (BC) communications affect the effectiveness of the monetary policy.Design/methodology/approachFor this analysis, a new Keynesian theoretical model and the ordinary least squared methodology were used. The objective to be achieved was to determine if there is some effect of economic transparency on accountability, inflation average, output gap, interest and central bank credibility.FindingsThe results highlighted that central banks with greater transparency contribute to decrease inflation rate and interest rate. The findings denote that an increase in the information quality (clarity) implies a significant change in the rate of readjustment of market expectations. Furthermore, central bank transparency contributes to anchor the public expectations and to affect long‐run interest rates.Research limitations/implicationsImpulse‐answer research was employed to show how the central bank transparency affects the credibility of monetary authorities.Practical implicationsThis paper suggests that the central bank publicizes its outlook, its policy monetary decisions, its expectations and its preferences.Originality/valueThe originality of the paper resides in the fact that empirical and theoretical studies were made in the single work. Also, new results were found denoting that economic transparency reduces uncertainty effect and increases the power of incentive contract made between the BC and public.

Central bank opacity and inflation uncertainty

“…de Mendonça and Simão Filho (2007) model this problem assuming that the shocks that the CB reveals to the public are subject to an error (opacity). The CB then publishes only partially its information on shocks.…”

Central bank transparency and exchange rate volatility effects on inflation-output volatility

“…The effects of central bank transparency on macroeconomic and financial variables are highlighted by the existing literature (see among others, Geraats, 2002;Beetsma and Jensen, 2003;Mishkin, 2004;de Mendonça and Simão Filho, 2007;Liu et al, 2008;Wilhelmsen and Zaghini, 2011;Papadamou, 2013;Papadamou et al, 2014Papadamou et al, , 2015Horváth and Vaško, 2016) 1 . Specifically, a number of authors have examined the link between central bank transparency indices and macroeconomic volatility 2 .…”

Brasil: ¿Cómo reaccionan los mercados financieros ante los anuncios de política monetaria del banco central en un esquema de metas de inflación?

“…A principios de la década de 1990, la fijación de objetivos de inflación se convirtió en una práctica frecuente, lo que acrecentó la conciencia respecto de la importancia de la transparencia en el proceso de formación de expectativas (Geraats, 2002;De Mendonça y Simão-Filho, 2007). En un contexto prospectivo, la política monetaria se convierte en gran medida en el arte de manejar las expectativas de los agentes privados (Woodford, 2003).…”