Three different approaches to transparency in monetary policy

We present three different views of imperfect transparency in monetary policy: political transparency, economic transparency and constructive ambiguity. The first two show that transparency reduces the variability of inflation and the output gap but does not affect their average levels. But if the Central Bank is unable to commit to one particular set of preferences for all circumstances, then in line with the hypothesis of constructive ambiguity we find that both the levels and the variability of output and inflation will be affected -- which means that this form of imperfect transparency could be used strategically. An empirical examination of these results, based on an index constructed by Eijffinger and Geraats, shows that macroeconomic averages are not much affected by transparency. But transparency appears to reduce the variability of inflation while increasing the variability of output. That suggests that Central Banks may in fact exploit constructive ambiguity when they try to be transparent.