Economic Transparency

The current issue and full text archive of this journal is available at www.emeraldinsight.com/0144-3585.htm Economic transparency and effectiveness of monetary policy

Economic transparency 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

497

˜
´
Jose Simao Filho
Department of Economics (Brazil), Fluminense Federal University,
Rio de Janeiro, Brazil
Abstract
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

References: Barro, R.J. and Gordon, D. (1983), “Rules, discretion and reputation in a model of monetary policy”, Journal of Monetary Economics, Vol Blinder, A. (2000), Central Banking in Theory and Practice, MIT Press, Cambridge, MA. Boyd, D. and Smith, R. (2006), “Monetary regimes and inflation in 12 Caribbean economies”, Journal of Economic Studies, Vol Chortareas, G., Stavage, D. and Sterne, G. (2002), “Does it pay to be transparent? International evidence from central bank forecasts”, Review, Vol Clare, A. and Courtenay, R. (2001), “What can we learn about monetary policy transparency from financial market data?”, discussion paper 06/01, Deutsch Bundesbank, Frankfurt am Main, Cukierman, A. (2000), “Establishing a reputation for dependability by means of inflation targets”, in Mahadeva, L Cukierman, A. (1992), Central bank Strategy, Credibility, and Independence: Theory and Evidence, MIT Press, Cambridge, MA. De Haan, J. and Eijffinger, S.C.W. (2000), “The democratic accountability of the European Central Bank: a comment on two fairy-tales”, Journal of Common Market Studies, Vol Faust, J. and Svensson, L.E.O. (2001), “Transparency and credibility: monetary policy with unobservable goals”, International Economic Review, Vol Fry, M., Julius, D., Mahadeva, L., Roger, S. and Sterne, G. (2000), “Key issues in the choice of monetary policy framework”, in Mahadeva, L Geraats, P.M. (2001), “Why adopt transparency? The publication of central bank forecasts”, Working Paper No Geraats, P.M. (2002), “Central bank transparency”, Economic Journal, Vol. 112, November, pp Goodfriend, M. (1986), “Monetary mystique: secrecy and central banking”, Journal of Monetary Economics, Vol Jensen, H.E. (2000), “Optimal degrees of transparency in European Union countries”, working paper, University of Copenhagen, Copenhagen. Muller, P. and Zelmer, M. (1999), “Greater transparency in monetary policy: impact on financial markets”, Technical Report No Staudinger, S. (2002), “Optimal monetary policy and the term structure of interest rates: a note”, Journal of Economic Studies, Vol Svensson, L.E.O. (1999), “Inflation targets as a monetary policy rule”, Journal of Monetary Economics, Vol Tarkka, J. and Mayes, D. (1999), “The value of publishing official central bank forecasts”, Discussion Paper 22/99, Bank of Finland – Research Department, Helsinki. Walsh, C. (1995), “Optimal contracts for central bankers”, American Economic Review, Vol. 85 No Walsh, C. (2003), “Accountability, transparency, and inflation targeting”, Journal of Money, Credit, and Banking, Vol White, H. (1980), “A heteroskedasticity-consistent covariance matrix estimator and a direct test for heteroskedasticity”, Econometrica, Vol Woodford, M. (2003), Interest and Prices: Foundations of a Theory of Monetary Policy, Princeton University Press, Princeton, NJ.