Home About Latest Browse RSS Advanced Search

Federal Reserve Bank of Chicago
Working Paper Series
Constrained Discretion and Central Bank Transparency
Francesco Bianchi
Leonardo Melosi

We develop and estimate a general equilibrium model to quantitatively assess the effects and welfare implications of central bank transparency. Monetary policy can deviate from active inflation stabilization and agents conduct Bayesian learning about the nature of these deviations. Under constrained discretion, only short deviations occur, agents’ uncertainty about the macroeconomy remains contained, and welfare is high. However, if a deviation persists, uncertainty accelerates and welfare declines. Announcing the future policy course raises uncertainty in the short run by revealing that active inflation stabilization will be temporarily abandoned. However, this announcement reduces policy uncertainty and anchors inflationary beliefs at the end of the policy. For the U.S., enhancing transparency is found to increase welfare. The same result is found when we relax the assumption of perfectly credible announcements.

Download Full text
Cite this item
Francesco Bianchi & Leonardo Melosi, Constrained Discretion and Central Bank Transparency, Federal Reserve Bank of Chicago, Working Paper Series WP-2016-15, 16 Oct 2016.
More from this series
JEL Classification:
Subject headings:
Keywords: Policy announcement; Bayesian learning; reputation; forward guidance; macroeco-nomic risk; uncertainty; inflation expectations; Markov-switching models; likelihood estimation
For corrections, contact Bernie Flores ()
Fed-in-Print is the central catalog of publications within the Federal Reserve System. It is managed and hosted by the Economic Research Division, Federal Reserve Bank of St. Louis.

Privacy Legal