Frederic Mishkin

Can Central Bank Transparency Go Too Far?


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Since the beginning of the 1990s, we have seen a revolution in the way central banks communicate with the markets and the public. In the old days, central banks were generally very secretive institutions. Not only did they not clarify what their objectives and strategies were, but they even kept the markets guessing about what were the actual setting of policy instruments. Although central bank secrecy reflects the natural desire of a bureaucracy to maximize power and prestige by avoiding accountability, the theory of time-inconsistency of optimal policies articulated by Kydland and Prescott (1977) and Calvo (1978) suggests that there might be a rationale for central bank secrecy because as this same Fed official stated, "most politicians have a shorter time horizon than is optimal for monetary policy." There are several problems with this secrecy approach to dealing with the time-inconsistency problem. First, having secretive central banks is inherently undemocratic. Although it makes sense to insulate central banks from short-run pressures to pursue overly expansionary monetary policy, basic democratic principles require that the central bank be accountable for its actions: this requires that the public understands what the central bank is doing. In addition, democratic principles indicate that the preferences of policymaking need to be aligned with those of the society at large. Furthermore, in the long run a central bank cannot operate without the support of the public. A secretive central bank may heighten suspicions that it is not acting in the public interest and so can eventually lead to curbs on its independence.

Source: Working Paper
Place: Cambridge, Mass.
Date: 9 2004