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On the Limits of Transparency: The Role of Imperfect Central Bank Knowledge

Authors

  • Marcelo Sánchez

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    1. European Central Bank, Frankfurt am Main, Germany
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    • The author gratefully acknowledges comments from two anonymous referees and the editor of this journal, as well as from seminar participants at the European Central Bank. The views expressed in this paper are those of the author and do not necessarily reflect the position of the European Central Bank.

Abstract

This paper studies the link between how much a central bank knows and reveals to the public. We focus on the central bank's attitude towards the evolving trade-off in its preferences between inflation and output. These preferences may shift depending on the economic structure and the composition of the monetary policy committee, making the central bank reluctant to commit to a specific trade-off between inflation and output. The quality of the information disclosed to the public is higher the more the central bank knows about how its preferences may evolve. The public forms inflation expectations reacting to the information it receives about central bank preferences, but also taking into account the worst possible inflation outcome. Macroeconomic stability is at its highest when the central bank reveals all the information it possesses about its preferences, regardless of how much the central bank knows about them. The quality of the information revealed to the public may also enhance macroeconomic stability.

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