Economic transparency and
effectiveness of monetary policy
Helder Ferreira de Mendonca
Department of Economics (Brazil), Fluminense Federal University, Rio de Janeiro, Brazil and
National Council for Scientiﬁc and Technological Development (CNPq), Brasilia, Brazil, and
Jose Simao Filho
Department of Economics (Brazil), Fluminense Federal University, Rio de Janeiro, Brazil
Purpose – The purpose of this paper is to study if the central bank (BC) communications affect the effectiveness of the monetary policy.
Design/methodology/approach – For this analysis, a new Keynesian theoretical model and the ordinary least squared methodology were used. The objective to be achieved was to determine if there is some effect of economic transparency on accountability, inﬂation average, output gap, interest and central bank credibility.
Findings – The results highlighted that central banks with greater transparency contribute to decrease inﬂation rate and interest rate. The ﬁndings denote that an increase in the information quality (clarity) implies a signiﬁcant change in the rate of readjustment of market expectations. Furthermore, central bank transparency contributes to anchor the public expectations and to affect long-run interest rates. Research limitations/implications – Impulse-answer research was employed to show how the central bank transparency affects the credibility of monetary authorities. Practical implications – This paper suggests that the central bank publicizes its outlook, its policy monetary decisions, its expectations and its preferences.
Originality/value – The originality of the paper resides in the fact that empirical and theoretical studies were made in the single work. Also, new results were found denoting that economic transparency reduces uncertainty effect and increases the power of incentive contract made between the BC and public.
Keywords Economic performance, Monetary policy, Inﬂation, Interest rates, Generation and dissemination of information
Paper type Research paper
In the last decades there has developed a consensus in the literature that the use of rules implies more advantages than discretion behavior in improving economic performance (Boyd and Smith, 2006). Nowadays the analysis on transparency is gaining the attention of several economists who analyze monetary policy. According to Fry et al. (2000), considering a set of 94 central banks, transparency is in third place as the most relevant variable in the conduction of monetary policy. Since it is recognized that effectiveness of monetary policy depends, in some measure, on the public’s capacity to anticipate actions of the central bank, it is hoped that transparency would help economic agents improve the forecast in relation to the conduction of
Journal of Economic Studies
Vol. 34 No. 6, 2007
q Emerald Group Publishing Limited
monetary policy. Under this view, transparency could contribute with an increase in accountability of the central bank in the search for targets, and thus, an increase in credibility. Jensen (2000), taking into consideration a New Keynesian model, found a result which strengthens this argument.
As pointed out by Staudinger (2002) one of the main advantages of the adoption of inﬂation targeting is the increase in transparency. Transparency is relevant to the conduction of monetary policy because it guides the expectations, especially when the lag of the transmission mechanism is larger than the period that is determined for the accomplishment of the target. Under this environment the publication of the central bank forecasts gains relevance. This information provides the absence of an explicit target and induces the public expectations to be...