Essays on transparency and financial markets

There appears to be a trend towards greater transparency in economic policy. This dissertation is about 'economic transparency', which is the extent to which economic information used for policy decisions is shared with the public. The focus is on monetary policy and the effect on private sector expectations and financial markets.;Recently, several central banks have started to disclose internal forecasts. A model is presented which shows that this reduces the inflationary bias of monetary policy and gives the central bank greater flexibility to change interest rates in response to shocks in the economy. It also makes it easier for a central bank to build reputation. To achieve these benefits it is generally necessary to publish the conditional central bank forecasts for both inflation and output.;Furthermore, this dissertation challenges conventional wisdom that commitment eliminates the inflationary bias of monetary policy. A simple model is analyzed in which the central bank 'precommits' through a policy action. A policy lag allows the public to adjust its inflation expectations before the action takes effect. Although there is no dynamic inconsistency, there is generally still an inflation bias that is caused by lack of economic transparency. This can also lead to seemingly perverse effects in financial markets, like an increase in inflation expectations in response to contractionary monetary policy.;In addition, the consequences of asymmetric policy objectives are analyzed. A general objective function for monetary policy is introduced that abandons certainty equivalence and features 'prudence' in output. It provides an alternative explanation for the positive relation between the level and variability of inflation, both across countries and over time. In particular, the model predicts a nonlinear effect of supply shocks on inflation that appears consistent with empirical evidence. It also suggests that lack of economic transparency could reduce average inflation.;All in all, the research in this dissertation provides a motivation for the trend towards greater economic transparency in monetary policy.