Central Bank Communication and Output Stabilization

Abstract

Central banks around the world have a reputation for being secretive about their operations and market assessments. It is sometimes argued that central banks need flexibility and therefore cannot be fully transparent. We find that this explanation does not carry through in a forward-looking New Keynesian framework, where transparency about the central bank's forecasting procedures improves output stabilization. We also show that higher transparency increases optimal conservatism, as the benefits from higher transparency in terms of output stabilization are greater the more conservative is the central bank.

JEL Classification: D83, E52, E58