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Transparency and Credibility: Monetary Policy With Unobservable Goals
Author(s) -
Faust Jon,
Svensson Lars E. O.
Publication year - 2001
Publication title -
international economic review
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 2.658
H-Index - 86
eISSN - 1468-2354
pISSN - 0020-6598
DOI - 10.1111/1468-2354.00114
Subject(s) - unobservable , transparency (behavior) , credibility , reputation , monetary policy , monetary economics , central bank , economics , observability , outcome (game theory) , business , accounting , microeconomics , econometrics , political science , computer science , computer security , law , mathematics
We define and study transparency, credibility, and reputation in a model where the central bank's characteristics are unobservable to the private sector and inferred from the policy outcome. Increased transparency makes the bank's reputation and credibility more sensitive to its actions. This moderates the bank's policy and induces the bank to follow a policy closer to the socially optimal one. Full transparency of the central bank's intentions is generally socially beneficial but frequently worse for the bank. Somewhat paradoxically, direct observability of idiosyncratic central bank goals removes the moderating influence on the bank and leads to the worst equilibrium.