Central banks' information transparency, foreign exchange regimes, and economic crises: Theoretical and empirical studies

The relationship between central banks' information transparency and the onset of economic crises has been a long discussed topic in economics. It attracts more attentions in the event of the Southeast Asian crises. Stiglitz (1998a, b and 1999) suggests that to investigate the true role of transparency in the economic crises, one has to find other factors that jointly cause a crises, and to combine these factors with transparency so that one can see how transparency perform in a crisis. Taking this suggestion, we use foreign exchange regimes and inflation target as the factors to see the relationship between the stable time policy combinations of transparency and regimes and the chance of experiencing crises in succeeding periods.; Our theoretical model is in the structure of monetary policy game. Since we do not discuss rule vs. discretion, we simply assume that the central bank adopts the discretionary monetary policy to affect the public's expectations of inflation and to accommodate money market disturbances. Moreover, we introduce the private information problem into our model to distinguish between transparent and opaque central banks. The theoretical model suggests that depending on the relative size of the central bank's inflation target and the public's inflation expectations, the central bank has different choices of its type, transparent or opaque. If the inflation target is greater than the public's expectations, then given a more flexible regime, the central bank should choose to be opaque, otherwise, transparent. However, if the target is less than the expectations, given a more flexible regime, the central bank ought to be transparent, otherwise, opaque.; Conducting empirical study to examine the relationship between the policy suggestions from the theoretical and the following economic crises, we found that three of the policy combinations are supported by the data; the only one left is the combination of a more flexible regime with an opaque type. In addition, applying the suggested policies to investigate the possible reasons that cause the Asian crises, we found that the cause of Malaysia cannot be explained well. This may be because that in our theoretical model, we did not put the onset of a crisis into it. This is a shortcoming of this paper; on the other hand, this is one of the directions that we can extend this model.