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Central Bank Transparency: Why, What, and How?

Central Bank Transparency: Why, What, and How?. Alan S. Blinder Federal Reserve Bank of Philadelphia 30 November 2001. “How Do Central Banks Talk?”. Alan Blinder Charles Goodhart Philipp Hildebrand David Lipton Charles Wyplosz. Our basic conclusion:. There is a presumption to reveal.

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Central Bank Transparency: Why, What, and How?

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  1. Central Bank Transparency: Why, What, and How? Alan S. Blinder Federal Reserve Bank of Philadelphia 30 November 2001

  2. “How Do Central Banks Talk?” Alan Blinder Charles Goodhart Philipp Hildebrand David Lipton Charles Wyplosz

  3. Our basic conclusion: • There is a presumption to reveal. • The central bank cannot tell everything. • But few are approaching this limit! • Our basic principle: The CB should reveal enough information so that interested observers understand what it is doing, why, and how it makes decisions. That includes “forward-looking” information.

  4. The “why” of transparency 1. Effectiveness of monetary policy 2. Democratic accountability

  5. Regarding policy effectiveness: • The transmission mechanism works through expectations (in financial, labor, and product markets). -- CB should try to condition expectations. -- Markets must learn to “think like the central bank.” • Transparency can make changes in policy easier to explain without losing credibility. • Theoretical arguments for mystery and surprise don’t hold up well to real-world circumstances.

  6. The “what” of transparency • Objectives: Harder for CBs with multiple objectives, but articulate them as best you can. • Methods (e.g., forecasts, models): Reveal almost everything. But the details are not really important. It’s the broad contours. • Decisions: Give forward-looking indicators (e.g., “balance of risks,” “bias”) -- Hard conceptual issue: Should CB reveal conditional forecasts of its own future decisions? -- Simple practical resolution: They can’t reveal what they don’t decide themselves.

  7. The “how” of transparency Will differ according to how decisions are made: • by an individual • by a “collegial” committee • by an “individualistic” committee

  8. Two examples • Statement vs. minutes • Expressing different views -- confusing “noise” on collegial? -- meaningful “news” on individualistic

  9. Is the Fed transparent or opaque? The Economist, comparing the ECB and the Fed (31 March 2001): “Its president, Wim Duisenberg, holds monthly press conferences. The bank has an inflation target. It has set out the theory on which its policy is based. Contrast this with [the] Federal Reserve, which unlike the ECB has no inflation target and no clear policy framework. The oracular word of its chairman, Alan Greenspan, is all that matters. Yet financial markets seem, most of the time, to understand what the Fed is doing.”

  10. Clear progress since 1993 • Announcements of interest rate changes • Statements • Revealing the “balance of risks” • Transcripts • Speeches, testimonies, etc.

  11. What’s left to be done? • Clarify objectives • Publish (all) forecasts • Fuller statements Q: What happens after Greenspan?

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