Greater Information Disclosure by Central Banks comes at a cost to Society

There are substantial costs associated with the greater disclosure of information by central banks, which may outweigh the benefits. That is the central conclusion of research by Vadym Lepetyuk and Christian Stoltenberg, published in the September 2013 issue of the Economic Journal. They argue that by providing better information about future inflation, central bankers weaken people''s incentives to protect themselves against potential fluctuations in their incomes by saving or taking out insurance.


Public policy announcements by central banks or tax authorities are commonly considered beneficial because firms and households can do better by acting on the information provided. A classic example is a firm that pre-sets its prices in advance. More precise inflation announcements allow the firm to set prices more appropriately.


But, the authors claim, in a race between weakened insurance incentives and better price-setting, the negative effect is likely to prevail. What''s more, they conclude, increasing income inequality in the United States over the past 30 years has driven the odds in favour of the negative rather than the positive effect of information.




Alan Greenspan, the former chairman of the US Federal Reserve once claimed: ''Since I''ve became a central banker, I''ve learned to mumble with great incoherence. If I seem unduly clear to you, you must have misunderstood what I said.'' This secretive view was for a long time a dogma for central banks and almost defined the profession itself.


That was yesterday. Right now, central banks all over the world provide more information and release it earlier to the public than ever before in their history. There is also widespread agreement that the movement toward more disclosure is socially beneficial.


This study argues that the case for disclosure is not obvious. The authors assert that by providing better information about future inflation, central bankers may not be acting in the best public interest. Instead of facilitating better insurance decisions, information provided by the central bank may actually distort insurance incentives.


In reality, people face uncertainty about the future and want to avoid fluctuations in their consumption, especially temporary declines. Typically, people enter into a variety of formal and informal saving and insurance agreements that allow them to survive over the periods of no income or to spread out the moments of income spikes. Crucial for the possibility to insure against such risks is that the risks have not yet been realised.


The key to the authors'' argument is that the additional information provided by the central bank essentially evaporates risk that could otherwise have been shared between people. Frequent announcements, especially when the information is precise, thus lead to frequent changes in the arrangements available for insurance and, in the end, they bring undesirable fluctuations in individual consumption.


Not only announcements of the central bank can be detrimental. Any public release of information can affect insurance incentives. Thus, announcements of changes in tax policy or other fiscal announcements also have negative consequences.


The negative effect of information is hard to avoid. The effect is present whenever there is uncertainty about the future and the announcements change people''s perception about the uncertainty. The presence of uncertainty is, in fact, the very reason why people would like to insure themselves in the first place.


The distortion of insurance incentives by announcements can constitute substantial costs for the society. The authors find that the average American household would be willing to sacrifice up to $195 of its annual consumption expenditures of $49,700 to avoid a perfectly precise announcement by the Federal Reserve of the inflation target in the next year.


''Policy Announcements and Welfare'' by Vadym Lepetyuk and Christian Stoltenberg is published in the September 2013 issue of the Economic Journal. Vadym Lepetyuk is at the Bank of Canada. Christian Stoltenberg is at the University of Amsterdam.