Commentary on " Are Contemporary Central Banks Transparent About Economic Models and Objectives and What Difference Does It Make?"

It is very appropriate that a conference on monetary policy transparency begin with a paper by Alex Cukierman. His 1986 paper with Allan Meltzer was the first modern treatment of transparency and the model developed in that paper continues to serve as the basic framework for much of the recent work in this area. Economists at most major central banks seem to feel the average inflation bias that occupied so much space in academic journals has been conquered. Whether it is because they now know to just do the right thing (McCallum 1995), because they target only the natural rate of output (Blinder, 1998; Svensson, 1999), or because they have gained reputations as inflation fighters through increased transparency and greater accountability is less certain. While many central banks have adopted operating procedures that are designed to provide the public with clearer and more complete information about policy decisions, and this increased transparency is often cited as critical for inflation targeters, Cukierman argues that transparency is still incomplete. This is true even among central banks that are quite transparent along some dimensions, publicly announcing inflation targets, for instance. This incompleteness limits the ability of the public to hold monetary policymakers accountable for their actions. Cukierman highlights two aspects of the policy environment that remain opaque—models and objectives. Emphasizing the role of objectives in the second half of his paper, Cukierman explores the implications for inflation of asymmetric preferences and, specifically, the case in which, at a given inflation rate, output expansions are viewed as beneficial while contractions are viewed as costly. Cukierman notes that the different notions of the output gap implicit in alternative models is one source of policy opaqueness. First, I want to develop more formally the distinction between alternative measures of the output gap and argue that different economic models and different definitions of the output gap lead to different policy objectives. If central banks are opaque about the models because of uncertainty about the true transmission mechanism of policy, then this will also be reflected in uncertainty (and therefore opaqueness) about the objectives of policy. Thus, uncertainty about the true economic model and opaqueness about policy objectives are intertwined. I then show that a model commonly used in the recent literature to analyze policy transparency arises naturally when the central bank targets the wrong output gap. Turning to asymmetric preferences, I provide a graphical representation of Cukierman’s model that helps to illustrate why a positive average inflation rate arises in equilibrium, and I then touch on the nonneutrality of money in the New Keynesian model he uses.