Academic journal article Federal Reserve Bank of St. Louis Review

Fed Transparency: How, Not Whether

Academic journal article Federal Reserve Bank of St. Louis Review

Fed Transparency: How, Not Whether

Article excerpt

Central bank transparency is a topic discussed almost as much as policy actions themselves. Market participants have always wanted to know the implications of policy actions for the likely future course of monetary policy, but the longstanding practice of central bank secrecy has frustrated their search. In recent years, monetary policymakers have disclosed much more than they did in the past, partly because of growing interest in being more accountable and partly because of recognition that policy actions will be more effective if the market understands them better.

Discussion of transparency has gone well beyond the financial pages. The past decade has seen numerous professional papers on transparency issues. In this literature, transparency is taken to mean public disclosure, and much of the discussion has centered on questions such as: How specific should central banks be about their policy objectives? Should they announce the weights they apply to their inflation and output stabilization objectives in conducting monetary policy? Should central banks disclose their economic forecasts? Should transcripts of the policy debate be published and, if so, how soon? Should policymaking meetings be televised?

My intent today is not to review the entire range of transparency debates but instead to concentrate on issues relating to the effects of monetary policy information on markets and on the effectiveness of monetary policy. I certainly do not believe that political accountability issues are unimportant, but my chosen topic is large enough to more than fully exhaust the time available today.

Before proceeding, I want to emphasize that the views I express here are mine and do not necessarily reflect official positions of the Federal Reserve System. I thank my colleagues at the Federal Reserve Bank of St. Louis--especially Robert Rasche, senior vice president and director of research, and Daniel Thornton, vice president and economic advisor-for their assistance and comments, but I retain full responsibility for errors.

My plan is to proceed by first outlining my model of how the economy works. That view is, I believe, the essential starting place for a discussion of transparency. I will then discuss two cases in which, depending on what view you have, market participants did not interpret Fed statements correctly or the Fed did not communicate clearly. Under either interpretation, there was some miscommunication.

I will use "transparency" as shorthand for accurately conveying accurate information including all the information market participants need to form opinions on monetary policy that are as complete as possible.


Analysis of policy communication logically begins with a description of the economic interaction between the central bank and the markets. I've provided my view of this interaction on several occasions; here I provide just enough of a sketch of this view to enable me to discuss communication issues. (1)

At a highly abstract level, I believe that the appropriate model of the economy is that markets behave in an efficient, fully informed way. Equilibrium requires that market participants form accurate expectations about the behavior of the central bank. The economy will function most efficiently if central bank policy has two features. First, the central bank must have clearly understood, appropriate, and feasible objectives. Second, the central bank must have a highly regular and predictable policy rule or response pattern that links policy actions to the state of the economy, including all information relevant to assessing the economy's probable future course. Pushing the idea of a full rational expectations equilibrium one step further, there should be a political equilibrium in which the central bank pursues objectives broadly accepted in society. Without broad political support, monetary policy objectives are subject to change through normal democratic processes and such change, or the prospect of it, adds to uncertainty about future monetary policy. …

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