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TRANSPARENCY IN MONETARY POLICY, SIGNALING, AND HETEROGENEOUS INFORMATION

Published online by Cambridge University Press:  12 March 2013

Volker Hahn
Volker Hahn*
Affiliation:
University of Konstanz
*
Address correspondence to: Volker Hahn, Department of Economics, University of Konstanz, Box 143, 78457 Konstanz, Germany; e-mail: volker.hahn@uni-konstanz.de.
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Abstract

We examine the welfare implications of two types of central-bank transparency: the publication of the information underlying the central bank's decision (decision transparency) and the release of the information that the central bank observes afterwards (postdecision transparency). Decision transparency does not make the public better informed in equilibrium. Even so, it may be socially desirable because it eliminates harmful equilibria. Postdecision transparency has ambiguous effects. It reduces output variance and the distortions stemming from heterogeneous information. In this sense, it can be used as a substitute for monetary policy. However, postdecision transparency generally raises the variance of inflation. We argue that a conflict of interests may arise between society and the central bank with regard to transparency.

Keywords

Monetary PolicyTransparencySignalingHeterogeneous Information
Type
Articles
Information
Macroeconomic Dynamics , Volume 18 , Issue 2 , March 2014 , pp. 369 - 394
Copyright
Copyright © Cambridge University Press 2013 

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