DP3194 | How Much Should Central Banks Talk? A New Argument

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20/02/2002

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Abstract

The openness of central bank decision making has recently received new attention in the literature. It has been argued that more openness reduces uncertainty for players on financial markets and makes future decisions more transparent. In this Paper I argue that the opposite may be the case. The argument is based on a model that studies the interaction of major macroeconomic players with the central bank. In the Paper I make a distinction between (i) uncertainty about the central banks objectives and (ii) inflation uncertainty. This distinction turns out to be crucial. I assume that the disclosure of information affects the degree of uncertainty about central bank objectives. Actual inflation uncertainty is, however, affected by these objectives and by the actions of all macroeconomic players. More uncertainty about future monetary policy leads to more wage discipline, which in turn lowers average inflation. In equilibrium, the variance of inflation may be reduced as well.