Introduction

Transparency is one of the biggest innovations in central bank policy of the past quarter-century. Modern central bankers believe that they should be as clear about their objectives and actions as possible. This notion arises from the view that policymakers should be a source of stability, not a source of noise, with the economy and markets responding to data and not to the policymakers themselves.

Inflation targeting is one of the first and most comprehensive implementations derived from this view. As a framework for monetary policy, inflation targeting involves ‘the public announcement of medium-term numerical targets for inflation [and] increased transparency of the monetary policy strategy through communication with the public and the markets about plans, objectives, and decisions of the monetary authority’ (Mishkin 2002: 361). The result is not just clearly understood and published numerical targets, but also inflation reports that explain past and likely future actions. Most economists believe that greater transparency is beneficial (see, for example, the surveys by Geraats 2002, Carpenter 2004, Dincer and Eichengreen 2007 and Walsh 2007). Transparency is not nudity, however. Understanding policymakers' contingency plans does not mean laying the policymaking process bare for all to see. Monetary policymakers should not put cameras in the meeting room. There are clear limits. What are they?