Central bank transparency under adaptive learning empirical evidence from Mexico

PurposeThe evidence concerning the effects of the inflation targeting (IT) regime as well as greater central bank transparency on monetary policy interest rates is not conclusive, and the following questions remain open. What is the effect of adopting IT on both the level and volatility of monetary policy interest rate? Does central bank transparency affect the level of the monetary policy interest rate and its volatility? Are these effects greater in developing countries? The purpose of this paper is to contribute to the literature by answering these questions. Hence, the paper analyzes the effects of IT and central bank transparency on monetary policy.Design/methodology/approachThe analysis uses a sample of 48 countries (31 developing) comprising the period between 1998 and 2014. Based on panel data methodology, estimates are made for the full sample, and then for the sample of developing countries.FindingsCountries that adopt the IT regime tend to have lower levels of monetary policy interest rates, as well as lower interest rate volatility. The effect of adopting IT on both the level and volatility of the basic interest rate is smaller in developing countries. Besides, countries with more transparent central banks have lower levels of monetary policy interest rates, as well as lower interest rate volatility. In turn, the effect of central bank transparency on both the level and volatility of the basic interest rate is greater in developing countries.Practical implicationsThe study brings important practical implications regarding the influence of both the IT regime and central bank transparency on monetary policy.Originality/valueStudies have sought to analyze whether IT and central bank transparency are effective to control inflation. However, few studies analyze the influence of IT and central bank transparency on interest rates. This study differs from the few existing studies since: the analysis is done not only for the effect of transparency on the level of the monetary policy interest rate, but also on its volatility; the central bank transparency index that is used has never been utilized in this sort of analysis; and the study uses panel data methodology, and compares the results between different samples.

PurposeThis paper relates to the literature on central bank (CB) transparency and inflation uncertainty. Considering that opacity is a possible source for inflation uncertainty the purpose of this paper is to test the hypothesis that increase in the dispersion of the degree of CB opacity generates higher levels of inflation uncertainty.Design/methodology/approachIn a first step, the authors present a theoretical model that shows how increase in the dispersion of the degree of CB opacity creates higher levels of inflation uncertainty. In a second step, the authors test the assumption that increase in the dispersion of the degree of CB opacity generates higher levels of inflation uncertainty in the Brazilian economy.FindingsThe findings denote that CB transparency is an important tool for guiding public expectations and thus contributes to avoiding the uncertainty caused by CB preferences.Originality/valueThis paper extends the theoretical model presented by de Mendonça and Simão Filho (2007) by the theoretical link between the forecast error and opacity. Furthermore, because the theoretical underpinning relies on the CB guiding inflation expectations, the authors construct an uncertainty measure based on survey of forecasts where such expectations can be inferred through the variability in the forecast error.

In the span of fifteen years, central bank transparency has gone from being highly controversial to an accepted broad goal to which all central banks pay at least lip service. Yet, like many other broad concepts in economic policy, what central bank transparency actually means remains rather open to debate. Recent monetary theory has been unsuccessful in providing clarity because it emphasizes the issue of discerning a central bank's type. In practice, central bank transparency has implications for a number of day-to-day issues. These include the persistence of inflation, the response of financial markets to central bank announcements, and the treatment of intermediate monetary targets - that is, central bank transparency influences the short-run dynamics of private-sector expectations. The evidence, in fact, is that the effect of greater transparency on these dynamics is beneficial. There is, however, a disturbing apparent disjunction between central bank transparency and accountability in reality. Recent developments in Japan and, to a lesser degree, in the United States and the eurozone have amply demonstrated that central bank independence can expand in harmful ways even as transparency increases and inflation targeting is adopted. It is time to discard two misleading claims: first, that increased transparency inhibits central bank independence; and second, that transparency provides sufficient accountability for central banks in democratic societies. Instead, we should remove the goal independence of all central banks that retain it, including the Bank of Japan, the Federal Reserve, and the European Central Bank.

Six Practical Views of Central Bank Transparency

A clear advantage: The benefits of transparency to crisis recovery

The Role of Central Bank Transparency for Guiding Private Sector Forecasts

National Culture and Central Bank Transparency

Central banks occupy a unique space in their national governments and in the global economy. The study of central banking however, has too often been dominated by an abstract theoretical approach that fails to grasp central banks’ institutional nuances. This comprehensive and insightful Handbook, takes a wider angle on central banks and central banking, focusing on the institutions of central banking. By 'institutions', Peter Conti-Brown and Rosa Lastra refer to the laws, traditions, norms, and rules used to structure central bank organisations. The Research Handbook on Central Banking’s institutional approach is one of the most interdisciplinary efforts to consider its topic, and includes chapters from leading and rising central bankers, economists, lawyers, legal scholars, political scientists, historians, and others.

This paper reports the results of a survey among private sector economists about credibility and transparency of central banks. In line with the survey of Alan Blinder among central bankers, we asked participants in Ifo’s World Economic Survey to answer questions on the importance and determinants of credibility. The results of both surveys are very comparable. Credibility is considered to be important to attain price stability at low cost, while the best ways to earn credibility are a history of honesty and a high level of central bank independence. According to our respondents, the Federal Reserve is the most credible, transparent and independent central bank out of seven large central banks. The ECB is not perceived as highly credible or tranparent, even though our respondents consider it to be very independent.

Credibility and Transparency of Central Banks: New Results Based on Ifo's World Economic Survey

This article extends the Dincer and Eichengreen (2007) index of central bank transparency. Improvements in transparency are notable in Central and Eastern Europe, whereas the index has shown much smaller rises in most other parts of the world. The pattern observed by Dincer and Eichengreen, consistent with a permanent increase in central bank transparency, is also evident in the updated results. The dramatic enhancements in central bank transparency reported earlier appear to be a feature of the late 1990s and the early 2000s. Whether the subsequent data reflect limits to central banks' transparency or, to some extent, transparency ‘fatigue’ is unclear.

To stabilize economies, central banks implemented unconventional monetary policies like quantitative easing following the global financial crisis. Although much research has been done on how quantitative easing affects financial markets, the influence of central bank transparency on bank profitability under such policies is still underexplored. This paper looks at how central bank transparency affects bank profitability in advanced countries under unconventional monetary policy. Using a panel dataset of commercial banks from 25 advanced economies (2013–2019), we apply a two-step Generalized Method of Moments (GMM) estimator to handle any endogeneity. Focusing on central bank transparency as a main transmission route, the model accounts for macroeconomic factors and bank-specific characteristics. The results show that central bank transparency greatly improves bank profitability together with quantitative easing. Although other elements, macroeconomic conditions and bank-specific characteristics, support transparency as a vital channel via which monetary policy influences the operation of the banking sector. This paper provides recommendations for legislators trying to enhance the effectiveness of unconventional policies in various institutional contexts by highlighting the need for central bank transparency as a channel for monetary policy efficacy.

Evidence of the evolution of ideas on central bank transparency can be found in the central bankers’ speeches during the period 1997-2012. Exploratory analysis of the central bankers’ speeches provides an overview of their use of language: speeches define the historical evolution of central banks’ discourses, and thus suggest how the concept of transparency has evolved. The paper invites reconsideration of the role of central banks’ transparency through analysis of central bankers’ speeches and their use of language as a part of their communication framework. While literature on transparency indexes shows increasing central bank transparency, the semantic area of transparency in central bankers’ speeches changed over the period 1997-2012. The paper investigates this evolution until recent shift towards new semantic areas pertaining more to the financial and real economy than to traditional inflation concerns. Jel Classification: B59, E58

Central bank transparency and central bank communication: Editorial introduction

National culture and central bank transparency: Cross-country evidence