Revisiting the Nexus Between Central Bank Transparency and Optimal Delegation

1. Introduction

Although the role of public information in influencing economic outcomes is a rather general issue which is relevant for overall macroeconomic management, discussions have often centred on the extent to which central banks disclose or should disclose their private information to the wider public. The present paper conforms to this focus, while concentrating on the nexus between central bank transparency and optimal delegation. In contrast with the theoretical debate, where authors favour the extremes of either full disclosure or zero disclosure, the international experience points to some intermediate degree of central bank transparency (Dincer et al., 2019). There has over recent years been a trend toward greater disclosure by central banks with sufficiently high transparency being now in place. At the same time, to the extent full transparency is not achieved, one must admit that central banks continue to be ambiguous about the private information they possess. Dincer et al.’s (2022a, 2022b) latest update of their international database, shows a broad rise in transparency, regardless of the level of economic development and monetary policy framework. In particular, greater monetary policy transparency has not been confined to inflation targeting central banks in advanced and emerging countries but has extended to other monetary policy frameworks and low-income countries. The positive trend in monetary policy transparency is also evident, to an extent, across all five of the aspects of monetary policy transparency that these authors consider when constructing our aggregate index, that is, across political, economic, procedural, policy and operational dimensions.

In studying the largely neglected interaction between transparency and optimal delegation, the present paper looks at how the central bank (CB) decides whether or not to reveal publicly its private information concerning the state of the economy, in connection with the issue of monetary regime design. The questions of CB transparency and appropriate design of monetary policy priorities have been addressed extensively in isolation from each other. For instance, there is a wide literature on optimal delegation that has spawned from Rogoff’s (1985) seminal contribution, and – largely in connection with this question – numerous empirical studies have investigated the link between CB independence and macroeconomic performance. Regarding CB transparency in its various modalities, the design of monetary institutions has over recent years increasingly adopted it worldwide. CB transparency is often seen as a crucial prerequisite for effective policymaking. The ongoing trend towards transparency contrasts with the far from unequivocal support that the theoretical literature attaches to the desirability of CB openness. Ambiguous (or even negative) welfare effects of increased CB disclosure of information are usual findings, depending on the specific context involved.

The present study investigates the strategic interaction between the CB and wage setters, in the tradition of studies where nominal and real macroeconomic variables are affected by the monetary policy setting. The related literature goes back to Soskice and Iversen (2000), Holden (2005), and Coricelli et al. (2006); it has since been developed further (on the theoretical and empirical fronts), among other studies, by Barbier-Gauchard et al. (2023), Calmfors and Larsson Seim (2013), Camarero et al. (2016), Di Bartolomeo (2014), Gjelsvik et al. (2020), Lamo et al. (2012), and Larsson Seim and Zetterberg (2013).