Central banks have continued to pursue greater monetary policy transparency since the global financial crisis, according to research by Nergiz Dincer, Barry Eichengreen and Petra Geraats, to be presented at the Royal Economic Society''s annual conference at the University of Sussex in Brighton in March 2018. But attempts to increase openness can be taken too far, they conclude, with the Bank of England providing a notable example.
The new study presents a transparency index measuring the degree of information disclosure about various aspects of the monetary policy-making process for 112 central banks from 1998 until 2015. The results show that monetary policy transparency has continued to increase throughout the world, across all monetary policy frameworks and levels of economic development.
While there has been a slowdown in some respects since the financial crisis, there has been a notable rise in the use of forward policy guidance. Focusing on how the central banks deployed and developed forward guidance for large-scale liquidity operations, asset purchases and policy rates during the post-crisis period, the authors find that its implementation can be fraught by complications.
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Transparency has become a touchstone of monetary policy in the post-financial-crisis world. There is now a broad consensus as to its desirability and utility.
Transparency enhances the effectiveness of monetary policy by making it easier to understand the central bank''s policy decisions. This imposes discipline on central banks, since unsubstantiated changes will have reputational costs. It thereby enhances their credibility, which results in inflation expectations being well-anchored and aligned with monetary policy objectives. This in turn makes it easier to achieve those objectives and makes policy outcomes more predictable.
Transparency also helps to improve the predictability of monetary policy decisions, so financial markets are less likely to be caught off-guard. Furthermore, it allows expectations of future policy to be incorporated into asset prices, so that monetary policy already becomes effective before it has even been implemented.
Finally, transparency enables public accountability, which helps to sustain support for the independence of the central bank, allowing it to avoid short-termism and insulate monetary policy-making from political pressures.
This study analyses whether and to what extent central banks have continued to be more transparent in their conduct of monetary policy during the post-crisis period. Building on their previous work, the authors present a transparency index that measures the degree of information disclosure about various aspects of the monetary policy-making process for 112 central banks from 1998 until 2015.
The index has been updated, revised and refined to capture developments since the global financial crisis. The authors now explicitly focus on monetary policy, put more emphasis on the timely disclosure of information, and provide greater granularity, including for forward guidance.
The results show that monetary policy transparency has continued to increase throughout the world, across all monetary policy frameworks and levels of economic development, although there has been a slowdown in some respects since the financial crisis.
In contrast, there has been a notable rise in the use of forward policy guidance in the post-crisis period. This suggests that providing information about likely future policy actions can be useful to provide further stimulus when monetary policy is constrained by policy rates near zero.
Through case studies, the authors illustrate how some prominent central banks – in particular the Bank of England, the European Central Bank and the US Federal Reserve – have become more transparent over time.
They focus on how the central banks deployed and developed forward guidance for large-scale liquidity operations, asset purchases and policy rates during the post-crisis period. They find that its implementation can be fraught by complications. They also show that attempts to increase openness can be taken too far, with the Bank of England providing a notable example.
The financial crisis has shown that central bank communications can be a powerful policy tool for managing expectations and improving the effectiveness of monetary policy. Although its successful implementation can be complicated, this study shows that central banks have continued to pursue greater monetary policy transparency in the post-crisis world.
Transparency of Monetary Policy in the Post-Crisis World by Nergiz Dincer, Barry Eichengreen and Petra Geraats
