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Transparency and Credibility: Monetary Policy With Unobservable Goals

We define and study transparency, credibility, and reputation in a model where the central bank's characteristics are unobservable to the private sector and inferred from the policy outcome. Increased transparency makes the bank's reputation and credibility more sensitive to its actions. T...

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Published in:	International economic review (Philadelphia) 2001-05, Vol.42 (2), p.369-397
Main Authors:	Faust, Jon, Svensson, Lars E. O.
Format:	Article
Language:	English
Subjects:	Activism Banking policy Banks Central banks Credibility Economic models Economic theory Employment Equilibrium Federal Reserve Bank Modelling Monetary economics Monetary policy Policy analysis Private sector Reputations Steady state economies Studies Supply shocks Transparency Unobservables
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container_end_page	397
container_issue	2
container_start_page	369
container_title	International economic review (Philadelphia)
container_volume	42
creator	Faust, Jon Svensson, Lars E. O.
description	We define and study transparency, credibility, and reputation in a model where the central bank's characteristics are unobservable to the private sector and inferred from the policy outcome. Increased transparency makes the bank's reputation and credibility more sensitive to its actions. This moderates the bank's policy and induces the bank to follow a policy closer to the socially optimal one. Full transparency of the central bank's intentions is generally socially beneficial but frequently worse for the bank. Somewhat paradoxically, direct observability of idiosyncratic central bank goals removes the moderating influence on the bank and leads to the worst equilibrium.
doi_str_mv	10.1111/1468-2354.00114
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source	EconLit s plnými texty; EBSCOhost Business Source Ultimate; International Bibliography of the Social Sciences (IBSS); Wiley; JSTOR Archival Journals and Primary Sources Collection
subjects	Activism Banking policy Banks Central banks Credibility Economic models Economic theory Employment Equilibrium Federal Reserve Bank Modelling Monetary economics Monetary policy Policy analysis Private sector Reputations Steady state economies Studies Supply shocks Transparency Unobservables
title	Transparency and Credibility: Monetary Policy With Unobservable Goals
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