2009 Articles

Comment on "Interest Rate Signals and Central Bank Transparency"

Woodford, Michael

This chapter makes an important contribution to the literature on the advantages and disadvantages of central-bank transparency. The most influential recent contribution on this topic has been the analysis of Morris and Shin (2002), who use a simple, highly stylized model of central bank communication to make the point that it is possible for full transparency not to be the optimal policy. In the model of Morris and Shin, the central bank has (imperfectly precise) information about a random fundamental state that is not directly observable by private decision makers, but the value of which is relevant to their decisions; the question posed is how precise a measure of its information it is desirable for the central bank to publicly reveal. Morris and Shin point out that the mere presumption that it would be desirable to increase the precision with which private decisions track the unobserved fundamental does not suffice to answer this question, for one can imagine circumstances under which a more precise announcement by the central bank actually reduces the average conformity of private decision makers' actions with the fundamental, even though it increases the precision of each of their estimates of the fundamental.