The Impact of Central Bank Transparency on Inflation Volatility

Over the past two decades, central banks throughout the world have been moving towards greater transparency about policy decisions, the targets that they seek to achieve through those decisions, and their economic outlook of likely future changes. The Central Bank transparency is likely to be of great importance in increasing the effectiveness of monetary policy and reducing macroeconomic volatility in a forward-looking environment. For this purpose, in this paper, the impact of central bank transparency on inflation volatility is considered in two groups of countries, the high-income, and low-income countries by using a panel data model. The results indicate that the impact of a Central Bank transparency is different for the two groups of countries. Increasing the transparency of central banks in high-income countries is associated with a decrease in inflation volatility while in low-income countries it increases inflation volatility. Furthermore, the interactive effect of transparency and monetary policy is not the same in the two groups of countries. This effect is negative for the high-income countries and positive for low-income countries. It implies that the transparency through monetary policy channel in high-income countries reduces inflation volatility, while in low-income countries the results is reverse. The results indicate that the effectiveness of monetary policy is increasing in transparency in high-income countries, but in low-income countries is reverse.