TRANSPARENCY OF MONETARY POLICY AND SUCCESS OF INFLATION TARGETING

Abstract

The purpose of this paper is to determine whether the transparency of monetary policy affects the likelihood of achieving the inflation target under the inflation targeting regime. Transparency is the degree of completeness of information that the central bank provides to the public-information about its own strategy, forecasts and decision-making procedures. The transparency index by Nergiz Dincer and Barry Eichengreen is used for econometric calculations. The study is based on cross-country panel data for 32 countries, each of which adhered to an inflation targeting policy at the time of the study. Calculations are based on binary choice logit models with random and fixed effects, as well as on instrumental variables. The paper reveals a steady influence of policy transparency on the success of inflation targeting implementation. As the openness of monetary authorities’ actions increases, the probability of achieving the inflation target also becomes higher. The revealed empirical evidence is consistent with the theoretical literature: transparent monetary policy strengthens the reputation of the central bank, and helps it manage inflation expectations. This influence, however, is non-monotonous: when a certain threshold level is reached, the positive effect of additional policy transparency is exhausted and its further increase may even reduce the effectiveness of inflation targeting. The study obtains estimates of this threshold level, which are then compared with the current level of transparency of the Bank of Russia monetary policy. At the moment the degree of transparency of the Russian monetary authorities’ actions is optimal. The results obtained can be useful for central banks when choosing the level of openness of monetary policy implementation procedures.