NCPA - National Center for Policy Analysis


June 2, 2009

Central bankers around the world have become more open about their goals and operations, which has been a boon to taming the ups and downs of inflation.  In a recent study by the National Bureau of Economic Research that examined the central banks of 100 nations, the authors found that the average transparency score increased from 3.4 in 1998 to 5.4 in 2006.

Therefore, openness can accomplish several things, say the authors:

  • If central banks make clear that they're serious about price stability, for example, unions will be less likely to anticipate high inflation and ask for outsized raises in wages.
  • Transparency about their commitment to long-term price stability also gives central bankers flexibility to deal with shorter-term disturbances.
  • Transparency also gives banks democratic accountability at a time when they have gained more autonomy.

However, not everyone agrees with these theories; some supporters of greater openness question whether transparency can go too far.

To address these concerns, the authors examine 15 indicators of central banks' political, economic, procedural, policy, and operational transparency.  They find that transparency rises with increases in nations' general level of economic and institutional development and with greater exchange-rate flexibility:

  • The biggest impact is on the variability of inflation; the more transparent a central bank becomes the less inflation jumps around.
  • The effect is most powerful when opaque central banks begin to open up and diminishes once a bank has reached a certain threshold of transparency.
  • The relationship of transparency to inflation persistence follows the same broad pattern although it's not as robust.

Whether the move to greater openness endures will depend on the consequences of openness.  As long as the public supports the benefits of reduced variability in inflation, then transparency should continue, the authors argue.

Source: Nergiz Dincer and Barry Eichengreen, "Central Bank Transparency: Causes, Consequences and Updates," National Bureau of Economic Research, Working Paper, No. 14791, March 2009.

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