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The Effects of Central Bank Transparency on Output Volatility: A closer look at developing countries

29 October 2021, 1:00 pm–3:00 pm

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A SSEES Centre for Comparative Studies of Emerging Economies seminar with Dr Justine Wood (Loughborough University)

This event is free.

Event Information

Open to

All

Availability

Yes

Cost

Free

Organiser

SSEES

In this online seminar, Dr Wood will present her work on the relationship between central bank transparency and output volatility, with a particular focus on the relationship in developing countries, with particular emphasis on nonlinear and diminishing returns to transparency and whether a potential optimal level of transparency exists. Moreover, to the author’s best knowledge, this is the first study to focus on its effect on output volatility specifically on developing countries.

A detailed summary can be found below:

Beginning with New Zealand in 1989, there has been a vast increase in the amount of information publicly released by central banks. While it is almost universally agreed that the original move towards greater transparency by central banks has been beneficial, it is also possible that the benefits of transparency are limited. This paper seeks to investigate the relationship between central bank transparency and output volatility, with a particular focus on the relationship in developing countries. We also aim to determine if there are nonlinear and diminishing returns to transparency; the notion that there may be an optimal level of transparency is also considered.

We utilize the monetary policy transparency index provided by Dincer et al. (2019), which provides annual data for over 112 central banks covering approximately 150 countries from 1998-2015. The relationship between central bank transparency and output volatility is determined using an Arellano-Bond dynamic, two-step generalized method of moments model as presented in Arellano and Bond (1991). 

We find that, as the level of central bank transparency increases, the level of output volatility decreases; however, the relationship is significantly nonlinear, demonstrating that there are indeed diminishing returns to the level of central bank transparency. The optimal level of transparency is found to be markedly lower than observed levels of central bank transparency for many countries. We compare the relationship between the model pre- and post-financial crisis and find evidence that increased levels of transparency could have smoothing effects in calm periods and panic inducing effects during times of crisis. The pre-crisis period is characterized by a negative relationship between central bank transparency and output volatility. However, there are no diminishing returns to the level of transparency; in fact, it appears that the more transparent a central bank is the less volatile output will be. More surprisingly, the post-crisis period is characterized by the opposite relationship to what was originally found for the full data set. Our model indicates that there is now a positive relationship between the level of transparency, which would mean that the more information a central bank releases to the public the more volatile output will be.

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