Imperfect transparency and the strategic use of information: an ever present temptation for central bankers?

Abstract

Most economists argue that transparency in monetary policy is desirable because it helps the private sector make better informed decisions. They also argue that a lack of transparency has been a key problem in Europe's monetary policy. Using standard models—where there are also opportunities to use fiscal policy—we show that a lack of transparency will have very different effects depending on whether it represents a lack of political transparency or a lack of economic (or information) transparency. The former allows the central bank to create and exploit a ‘strategic’ reputation to its own advantage. The latter does not. Thus, political transparency helps us understand how monetary policy decisions are made. But economic transparency would reveal what information went into those decisions.