The Equilibrium Degree of Transparency and Control in Monetary Policy / Jon Faust, Lars E.O. Svensson.

Format:

Book

Author/Creator:

Faust, Jon.

Contributor:

National Bureau of Economic Research.

Svensson, Lars E.O.

Series:

Working Paper Series (National Bureau of Economic Research) no. w7152.

NBER working paper series no. w7152

Language:

English

Physical Description:

1 online resource: illustrations (black and white);

Place of Publication:

Cambridge, Mass. National Bureau of Economic Research 1999.

Summary:

We examine a central bank's endogenous choice of degree of control and degree of transparency, under both commitment and discretion. Under commitment, we find that the deliberate choice of sloppy control is far less likely under a standard central-bank loss function than reported for a less standard loss function by Cukierman and Meltzer. Under discretion, maximum degree of control is the only equilibrium. With regard to the degree of transparency, under commitment, a sufficiently patient bank with sufficiently low average inflation bias will always choose minimum transparency. Under discretion, both minimum and maximum transparency are equilibria. We argue that discretion is the more realistic assumption for the choice of control and that commitment is more realistic for the choice of transparency. A maximum feasible degree of control with a minimum degree of transparency is then a likely outcome. The Bundesbank and the Federal Reserve System are, arguably, examples of this outcome.

Notes:

Print version record

June 1999.