Economic transparency and effectiveness of monetary policy

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 increases the power of incentive contract made between the BC and public.

Citation

Ferreira de Mendonça, H. and Simão Filho, J. (2007), "Economic transparency and effectiveness of monetary policy", Journal of Economic Studies, Vol. 34 No. 6, pp. 497-514. https://doi.org/10.1108/01443580710830961