Central bank transparency and inflation (volatility) – new evidence

The last decades have shown a tendency towards higher central bank transparency. This leads to the question of how central bank transparency is entangled with price stability and inflation volatility. A plethora of studies analysed the relationship from a theoretical point of view and came to contra...

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Bibliographic Details
Published in:International economics and economic policy 2018, Vol.15 (1), p.21-67
Main Author: Weber, Christoph S.
Format: Article
Language:English
Subjects:
Central banks
Economic forecasting
Economic Policy
Economic theory
Economics
Economics and Finance
Expectations
Forecasts and trends
Inflation
Inflation (Finance)
International Economics
Macroeconomics/Monetary Economics//Financial Economics
Original Paper
Public Finance
Stability
Transparency
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Summary:The last decades have shown a tendency towards higher central bank transparency. This leads to the question of how central bank transparency is entangled with price stability and inflation volatility. A plethora of studies analysed the relationship from a theoretical point of view and came to contradictory results. Thus, the article aims to analyse this question empirically and to better understand the mechanism behind it. Firstly, the results show that transparency reduces inflation expectations and inflation even if we control for other determinants. However, transparency alone is not sufficient to produce stable prices. Secondly, the paper proves that the effect on inflation mainly comes from reduced inflation expectations. Thirdly, we show that central bank transparency seems to diminish inflation uncertainty. This confirms the economic importance of central bank transparency.
ISSN:1612-4804
1612-4812
DOI:10.1007/s10368-016-0365-z