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.