nr 031 - The Impact of Central Bank Transparency on Inflation Expectations
- DNB Working Papers
-
Date 31 March 2005
In contrast to previous empirical attempts to examine the effect of
increasing central bank transparency on macroeconomic magnitudes,
we investigate how the link between inflation and inflation
expectations alters with increasing transparency. Our motivation
stems from the belief that changes in the institutional features or
operations of the Central Bank affect, first and foremost, the way
that private agents form their expectations about the future
behaviour of the Central Bank, and only through them, inflation. We
apply the framework used by Levin et al (2004) who differentiate
between inflation targeters and countries that do not have explicit
quantitative objectives. They discover that inflation targeters
benefit from a weaker link between inflation and expectations, and
the more so for longer horizons. We, in turn, examine whether this
observation still holds as central banks become more transparent.
Our attempt is facilitated by the recent development of
quantitative measures for transparency, used in the main text. We
find that our results provide some evidence to substantiate the
beneficial impact of transparency, on helping fix private sector
expectations. JEL-Codes: E31, E52, E58 Keywords: Central Bank
Transparency, Inflation Expectations, Monetary Policy