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On the Limits of Transparency: The Role of Imperfect Central Bank Knowledge
Author(s) -
Sánchez Marcelo
Publication year - 2013
Publication title -
international finance
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.458
H-Index - 39
eISSN - 1468-2362
pISSN - 1367-0271
DOI - 10.1111/j.1468-2362.2013.12029.x
Subject(s) - transparency (behavior) , commit , economics , inflation targeting , central bank , monetary economics , inflation (cosmology) , monetary policy , quality (philosophy) , monetary reform , perfect information , imperfect , microeconomics , political science , philosophy , linguistics , physics , epistemology , database , theoretical physics , computer science , law
This paper studies the link between how much a central bank knows and reveals to the public. We focus on the central bank's attitude towards the evolving trade‐off in its preferences between inflation and output. These preferences may shift depending on the economic structure and the composition of the monetary policy committee, making the central bank reluctant to commit to a specific trade‐off between inflation and output. The quality of the information disclosed to the public is higher the more the central bank knows about how its preferences may evolve. The public forms inflation expectations reacting to the information it receives about central bank preferences, but also taking into account the worst possible inflation outcome. Macroeconomic stability is at its highest when the central bank reveals all the information it possesses about its preferences, regardless of how much the central bank knows about them. The quality of the information revealed to the public may also enhance macroeconomic stability.