Central Bank Transparency in Theory and Practice

We study the effects of Central Bank transparency on inflation and the output gap. We thus first identify a small analytical model which concludes that transparency affects the variability of inflation and output and not their average levels. Then we examine whether this conjecture holds empirically, employing the recently derived index of transparency by Eijffinger and Geraats. The empirical findings confirm that the averages are not affected by transparency. It does seem to explain however, about 50% of the variability in inflation. The relation between transparency and output volatility is less clear but appears to be positive rather than negative.central bank, economic and political transparency, inflation and output gap performance