J ULY/AUGUST 2002 99 Does It Pay To Be Transparent? International Evidence from Central Bank Forecasts Georgios Chortareas, David Stasavage, and Gabriel Sterne I. INTRODUCTION T he past decade witnessed an increased interest in the institutional framework of monetary policy. The benefits of central bank independence have been demonstrated in much academic research and have become conventional wisdom among policymakers. 1 New questions have emerged, however, about the institutional character- istics of central banks and their effect on economic performance; recent analyses have attempted to identify optimal degrees of independence, account- ability, and transparency in monetary policy. Relative to the abundant literature on the effects of central bank independence, only limited research exists so far on the issues of transparency and accountability in monetary policy. Furthermore, empirical analyses have mostly focused on financial markets and used time-series data. 2 In this paper we examine how monetary policy transparency is associated with inflation and output in a cross- section of 87 countries. We use a particular concept of transparency that relates to the detail in which central banks publish economic forecasts (hence- forth “transparency in forecasting”). We employ a new data set based on a survey conducted by Fry, Julius, Mahadeva, Roger, and Sterne (2000) (hence- forth FJMRS). To our knowledge these are the only data covering transparency in monetary policy across such a wide cross-section of countries. Our results show that a higher degree of trans- parency in monetary policy is associated with lower inflation. The relationship is robust to various econometric specifications and holds regardless of whether the domestic nominal anchor is based more on an inflation or a money target. In contrast, our results suggest that the publication of forecasts has no significant impact on inflation in countries that target the exchange rate. In addition, we do not find evidence to support the proposition that a high degree of transparency is associated with higher output volatility. The rest of this paper is organized as follows. The next section reviews the relevant empirical and theoretical literature. Section III provides a discus- sion of our survey dataset. The econometric analysis and the discussion of our results are contained in Section IV, and Section V assesses the robustness of those results. II. REVIEW OF THE LITERATURE The currently expanding theoretical literature on central bank transparency identifies various channels through which increased transparency may affect economic policy outcomes. Not all of these move in the same direction. And neither is there a universally accepted definition of central bank transparency. 3 Various authors conceptualize transparency in different ways, focusing on prefer- ences, models, knowledge about the shocks hitting the economy, the decisionmaking process, or the implementation of policy decisions. 4 The models by Faust and Svensson (2000, 2001), Jensen (2000), Geraats (2001a), and Tarkka and Mayes (1999) all assume private information about the central bank’s objectives/intentions. Transparency is modeled as the degree of asymmetric information about control 1 See Blinder (2000). 2 Some exceptions are the papers by Briault, Haldane, and King (1996) and Nolan and Schaling (1996). Their focus, however, is on account- ability rather than on transparency, and these accountability measures involve only 14 countries. 3 Blinder et al. (2001) assess why, how, and what central banks do and should talk about. Winkler (2000) discusses issues related to the defi- nition of transparency. 4 For example, see Geraats (2001a) for a classification. Georgios Chortareas is an economist in the International Economic Analysis Division, Bank of England. David Stasavage is a lecturer in the Department of International Relations, London School of Economics. Gabriel Sterne is an economist in the International Economic Analysis Division, Bank of England. The authors thank the following for their helpful comments and suggestions: Andrew Bailey, Lawrence Ball, Alec Chrystal, Rebecca Driver, Petra Geraats, Charles Goodhart, Andrew Haldane, Andrew Hauser, Marion Kohler, Kenneth Kuttner, Lavan Mahadeva, Adam Posen, Daniel Thornton, Peter Westaway, Mark Zelmer, and the participants of the 26th Annual Economic Policy Conference of the Federal Reserve Bank of St Louis, Bank of England seminars, the 2001 Eastern Economic Association meetings, the 2001 Public Choice Society meetings, and the 2001 Congress of the European Economic Association. The views expressed are those of the authors and not necessarily those of the Bank of England. © 2002, The Federal Reserve Bank of St. Louis.