TY  - JOUR
AU  - Faust,Jon
AU  - Svensson,Lars E. O.
TI  - Transparency and Credibility: Monetary Policy with Unobservable Goals
JF  - National Bureau of Economic Research Working Paper Series
VL  - No. 6452
PY  - 1998
Y2  - March 1998
UR  - http://www.nber.org/papers/w6452
L1  - http://www.nber.org/papers/w6452.pdf
N1  - Author contact info:
Jon Faust
Johns Hopkins University
Department of Economics
Mergenthaler Hall 456
3400 N. Charles Street
Baltimore, MD 21218
Tel: 410/516-7614
Fax: 410/516-7600
E-Mail: faustj@jhu.edu

Lars E.O. Svensson
Sveriges Riksbank
SE-103 37 Stockholm
SWEDEN
Tel: +46 8 787 0107
Fax: +46 8 21 0531
E-Mail: lars.svensson@iies.su.se
AB  - We define and study transparency, credibility, and reputation in a model where the central bank's characteristics are unobservable to the private sector and are inferred from the policy outcome. A low-credibility bank optimally conducts a more inflationary policy than a high-credibility bank, in the sense that it induces higher inflation, but a less expansionary policy in the sense that it induces lower inflation and employment than expected. Increased transparency makes the bank's reputation and credibility more sensitive to its actions.  This has a moderating influence on the bank's policy.  Full transparency of the central bank's intentions is generally socially beneficial, but frequently not in the interest of the bank.  Somewhat paradoxically, direct observability of idiosyncratic central bank goals removes the moderating incentive on the bank and leads to the worst equilibrium.
ER  -