Seminar Papers, Institute for International Economic Studies, Stockholm University
The Equilibrium Degree of Transparency and Control in Monetary Policy
() and Jon Faust
Abstract: We examine a central bank's endogenous choice of degree of
control and degree of transparency, under both commitment and discretion.
Under commitment, we find that the deliberate choice of sloppy control is
far less likely under a standard central-bank loss function than reported
for a less standard loss function by Cuikerman and Meltzer. Under
discretion, maximum degree of control is the only equilibrium. With regard
to the degree of transparency, under commitment, a sufficiently patient
bank with sufficiently low average inflaiton bias will always choose
minimum transparency. Under discretion, both minimum and maximum
transparency are equilibria. We argue that discretion is the more realistic
assumption for the choice of control and that commitment is more realistic
for the choice of transparency. A maximum feasible degree of control with a
minimum degree of transparency is then a likely outcome. The Bundesbank and
the Federal Reserve System are, arguably, examples of this outcome.
Keywords: Monetary policy; Central banks; (follow links to similar papers)
JEL-Codes: E52; E58; (follow links to similar papers)
31 pages, April 1, 1999
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