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Abstract:
We examine a central bank's endogenous choice of degree of control and
degree of transparency, under both commitment and discretion. Under
commitment, we find that the deliberate choice of sloppy control is far less
likely under a standard central-bank loss function than reported for a less-standard
loss function by Cukierman and Meltzer. Under discretion, the maximum
degree of control is the only equilibrium. With regard to the degree of
transparency, under commitment, a sufficiently patient bank with
sufficiently low average inflation bias will always choose minimum
transparency. Under discretion, both minimum and maximum transparency are
equilibria. We argue that discretion is the more realistic assumption for
the choice of control and that commitment is more realistic for the choice
of transparency. A maximum feasible degree of control with a minimum degree
of transparency is then a likely outcome. The Bundesbank and the Federal
Reserve System are, arguably, examples of this outcome.
Full paper (278 KB PDF)
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