The Federal Reserve Board eagle logo links to home page

International Finance Discussion Papers
The International Finance Discussion Papers logo links to the International Finance Discussion Papers home page Transparency and Credibility: Monetary Policy with Unobservable Goals
Jon Faust and Lars E.O. Svensson
1998-605  (March 1998)

Abstract:  We define and study transparency, credibility, and reputation in a model where the central bank's characteristics are unobservable to the private sector and are inferred from the policy outcome. A low-credibility bank optimally conducts a more inflationary policy than a high-credibility bank, in the sense that it induces higher inflation, but a less expansionary policy in the sense that it induces lower inflation and employment than expected. Increased transparency makes the bank's reputation and credibility more sensitive to its actions. This has a moderating influence on the bank's policy. Full transparency of the central bank's intentions is generally socially beneficial, but frequently not in the interest of the bank. Somewhat paradoxically, direct observability of idiosyncratic central bank goals removes the moderating incentive on the bank and leads to the worst equilibrium.

Full paper (384 KB PDF)

Credibility, transparency, monetary policy, dynamic game

PDF files: Adobe Acrobat Reader   ZIP files: PKWARE

Home | IFDPs | List of 1998 IFDPs
To comment on this site, please fill out our feedback form.
Last update: July 19, 2001