Commentary on "Does it Pay to be Transparent? International Evidence From Central Bank Forecosts"

In the span of 15 years, central bank transparency has gone from being highly controversial to motherhood and apple pie (or knighthood and fish and chips to the Bank of England–based authors of this paper). It is now an accepted broad goal to which all central banks pay at least lip service. Yet, like many other broad concepts in macroeconomic policy, such as “fiscal discipline” or “price stability,” what central bank transparency actually means remains rather open to debate. Chortareas, Stasavage, and Sterne make a valiant attempt to test whether one particular aspect of transparency— the release of economic forecasts by central banks to the public—confers the benefits that some theories predict it should. Recent monetary theory has had difficulties in generating much in the way of operational hypotheses about transparency for empirical examination. The bulk of today’s theoretical models applied to central bank transparency—including those in the formal analysis of inflation targeting—cast the issue as whether or not a representative agent of the public can discern the central bank’s “type” (wet or dry; that is, soft or hard on inflation) and therefore whether it is more or less “credible.”1 This is simply the wrong question to frame, especially in the developed economies: no one really has any doubts about the commitment of any current central banks to low inflation, and any reasons for doubt in this area would quickly become self-evident.2 Even in the developing economies (which make up the bulk of the authors’ sample), discerning runaway fiscal positions, overt political pressures upon central bank governors, or economic world views at odds with today’s (perhaps questionable but evident) consensus on a vertical long-run Phillips curve is rather easy. Moreover, the all-or-nothing trigger strategy in these models implies that, once a central bank type is revealed, all is determined. This unrealistically reduces the conversation between central banks and the private sector to a simple long-lasting thumbs up or thumbs down. For purposes of even applied research, the failure of the predictions of these widely used models raises further questions3 about much of the theoretical time-inconsistency framework that has been the workhorse of monetary economics in the last 20 years.4 The authors, presumably in pursuit of rigor and microfoundations, go to great pains to survey the extant literature in order to claim a source for their two testable hypotheses: that greater transparency reduces average inflation and increases output volatility. Yet, the fact that these hypotheses can easily be generated by a host of differing models and say nothing specific about which (measurable) aspect of transparency is at issue only underscores how irrelevant these microfoundations are. The two real issues are, instead, as follows: (i) to come up with hypotheses that are specific to transparency as distinct from just one more set of circular statements indicating that more credible central banks have better inflation performance and (ii) to derive reproducible measures of transparency that differentiate among the various types of information that may be disclosed by central banks. Unfortunately, the authors stick with the broad hypotheses and arbitrarily focus on a particular aspect of transparency, idiosyncratically measured. This puts them somewhat at odds with those few rigorous empirical investigations of central bank transparency that have already been done. Does it pay to be transparent? Yes, but not in the way the authors suggest.