Revisiting the Nexus Between Central Bank Transparency and Optimal Delegation

Abstract

The chapter studies the nexus between optimal delegation and central bank communication about productivity shocks. We assume that the goods market is monopolistically competitive, and the central bank has the mandate to offset the price pressure arising from wage setting by non-atomistic unions. Compared with the related literature, the setup used here is more realistic in that it predicts both positive unemployment and no inflation bias. The authors find that optimal delegation always involves some type of monetary policy conservativeness (relative to social preferences), involving either a finite or infinite weight on the inflation objective. This approach to calibration and simulation produces clear-cut results in favour of full monetary policy transparency, in which case optimal delegation requires that the central bank focus exclusively on price stability. Contributing to central bank transparency are unions that internalise the macroeconomic impact of their wage decisions and put a not-too-great emphasis on real wage stability relative to employment stability.