Central Bank Transparency under Model Uncertainty,FRBNYWorking Paper

This paper explores the e¤ects of central bank transparency on the performance of optimal ination targeting rules. I assume that both the central bank and the private sector face uncer-tainty about the correctmodel of the economy and have to learn. A transparent central bank can reduce one source of uncertinty for the private agents by communicating its policy rule to the public. The paper shows that central bank transparency plays a crucial role in stabilizing the agents learning process and expectations. On the contrary, lack of transparency can lead to expectations-driven uctuations with destabilizing e¤ects on the economy, even in the case where the central bank adopts optimal policies