Central bank opacity and inflation uncertainty

Abstract

Purpose This paper relates to the literature on central bank (CB) transparency and inflation uncertainty. Considering that opacity is a possible source for inflation uncertainty the purpose of this paper is to test the hypothesis that increase in the dispersion of the degree of CB opacity generates higher levels of inflation uncertainty. Design/methodology/approach In a first step, the authors present a theoretical model that shows how increase in the dispersion of the degree of CB opacity creates higher levels of inflation uncertainty. In a second step, the authors test the assumption that increase in the dispersion of the degree of CB opacity generates higher levels of inflation uncertainty in the Brazilian economy. Findings The findings denote that CB transparency is an important tool for guiding public expectations and thus contributes to avoiding the uncertainty caused by CB preferences. Originality/value This paper extends the theoretical model presented by de Mendonça and Simão Filho (2007) by the theoretical link between the forecast error and opacity. Furthermore, because the theoretical underpinning relies on the CB guiding inflation expectations, the authors construct an uncertainty measure based on survey of forecasts where such expectations can be inferred through the variability in the forecast error.

Central bank transparency, inflation targeting and monetary policy: a panel data approach

“…When a central bank is opaque, instead, agents need to learn also the policy rule. The study prepared by de Almeida et al (2017) present a theoretical model that shows how increases in the dispersion of the degree of CB opacity create higher levels of inflation uncertainty, and test the assumption that increases in the dispersion of the degree of central bank opacity generates higher levels of inflation uncertainty. The results indicate that central bank opacity increases the uncertainty on future inflation, i.e., the results support the view that central bank transparency is an important tool for reducing inflationary uncertainty.…”