Abstract

Since the move toward more central bank transparency, a lot of research on its desirability from an economic viewpoint has been carried out. We provide an up-to-date overview of this transparency literature. First, we show how the theoretical literature has evolved by looking into branches inspired by Cukierman and Meltzer (1986) and by investigating several, more recent research strands (e.g., coordination and learning). Then, we review the empirical literature that has been growing recently. Last, we discuss whether the empirical research resolves all theoretical question marks, how the findings of the literature match the actual practice of central banks, and where there is scope for more research.

Introduction

Central banks used to be very secretive, but in the last two decades a lot of central banks have changed their regime into a more transparent one. As central banks became independent, transparency gained importance because it is a necessary prerequisite of accountability, for which the need increased. An additional reason why transparency came into prominence is its likely influence on the formation of expectations. With the increased importance of financial markets, managing inflation expectations has become key in monetary policymaking. It determines the success of the transmission of monetary policy. There are several benefits from successfully steering market expectations, like reduced uncertainty, improved planning of market participants, lower interest rate volatility, and more effective monetary policy (e.g., Issing 2005). It is, however, not obvious whether transparency actually improves the steering of market expectations.