Optimal Central Bank transparency

C.A.B. van der Cruijsen, S.C.W. Eijffinger, L.H. Hoogduin

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Abstract

Should central banks increase their degree of transparency any further? We show that there is likely to be an optimal intermediate degree of central bank transparency. Up to this optimum more transparency is desirable: it improves the quality of private sector inflation forecasts. But beyond the optimum people might: (1) start to attach too much weight to the conditionality of their forecasts, and/or (2) get confused by the large and increasing amount of information they receive. This deteriorates the (perceived) quality of private sector inflation forecasts. As a result, inflation is set in a more backward looking manner resulting in higher inflation persistence. By using a large scale panel data set on the transparency of central banks we find empirical support for an optimal intermediate degree of transparency at which inflation persistence is minimized. Our results indicate that while several central banks would benefit from further transparency increases, some already have reached the optimal level.
Original languageEnglish
Pages (from-to)1482-1507
JournalJournal of International Money and Finance
Volume29
Issue number8
Publication statusPublished - 2010

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Central bank transparency
Transparency
Central bank
Private sector
Inflation forecasts
Inflation persistence
Perceived quality
Conditionality
Inflation
High inflation
Panel data

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van der Cruijsen, C. A. B., Eijffinger, S. C. W., & Hoogduin, L. H. (2010). Optimal Central Bank transparency. Journal of International Money and Finance, 29(8), 1482-1507.
van der Cruijsen, C.A.B. ; Eijffinger, S.C.W. ; Hoogduin, L.H. / Optimal Central Bank transparency. In: Journal of International Money and Finance. 2010 ; Vol. 29, No. 8. pp. 1482-1507.
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van der Cruijsen, CAB, Eijffinger, SCW & Hoogduin, LH 2010, 'Optimal Central Bank transparency', Journal of International Money and Finance, vol. 29, no. 8, pp. 1482-1507.

Optimal Central Bank transparency. / van der Cruijsen, C.A.B.; Eijffinger, S.C.W.; Hoogduin, L.H.

In: Journal of International Money and Finance, Vol. 29, No. 8, 2010, p. 1482-1507.

Research output: Contribution to journalArticleScientificpeer-review

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AB - Should central banks increase their degree of transparency any further? We show that there is likely to be an optimal intermediate degree of central bank transparency. Up to this optimum more transparency is desirable: it improves the quality of private sector inflation forecasts. But beyond the optimum people might: (1) start to attach too much weight to the conditionality of their forecasts, and/or (2) get confused by the large and increasing amount of information they receive. This deteriorates the (perceived) quality of private sector inflation forecasts. As a result, inflation is set in a more backward looking manner resulting in higher inflation persistence. By using a large scale panel data set on the transparency of central banks we find empirical support for an optimal intermediate degree of transparency at which inflation persistence is minimized. Our results indicate that while several central banks would benefit from further transparency increases, some already have reached the optimal level.

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