Chapter

Revealing the Secrets of the Temple

Glenn D. Rudebusch and John C. Williams

in Asset Prices and Monetary Policy

Published by University of Chicago Press

Published in print October 2008 | ISBN: 9780226092119
Published online February 2013 | e-ISBN: 9780226092126 | DOI: http://dx.doi.org/10.7208/chicago/9780226092126.003.0007
Revealing the Secrets of the Temple

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This chapter examines the unresolved debate among central bankers and researchers about the value of the direct signaling of policy intentions. The chapter is organized as follows. Section 6.2 describes the real-world direct signaling of policy inclinations by central banks and outlines some of the arguments for and against such transparency. Sections 6.3 and 6.4 examine the macroeconomic effects of direct revelation of a central bank's expectations about the future path of the policy rate in a small theoretical model, in which private agents have imperfect information about the determination of monetary policy. In particular, it focuses on the desirability of central bank transparency about the expected path of policy when the public is uncertain about the central bank's preferences and, therefore, the future path of policy. It is shown that publication of interest rate projections better aligns the expectations of the public and the central bank. Under reasonable conditions, improving the alignment of expectations helps the central bank better meet its goals, providing support for full central bank transparency.

Keywords: central bankers; monetary policy; central bank transparency; interest rate projections

Chapter.  18276 words.  Illustrated.

Subjects: Macroeconomics and Monetary Economics

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