The Impact Of Central Bank Transparency On Inflation Expectation

Price stability is one of the main objectives of macroeconomic regulation andcontrol, and inflation management is one of the issues among researchers. SinceLucas introduced expectation to inflation management, the study of inflationexpectation has become an important part of the study of inflation. The core ofexpectation management is how to guide public expectation, and this requires thecentral bank communicate with the public. This means to improve the transparencyof central bank. As governments enhance the transparency of central bank, theimpact of central bank transparency on inflation expectation is getting more andmore attention.We investigate how the link between inflation and inflation expectation alterswith increasing transparency. Our motivation stems from the belief that changes inthe institutional features or operations of the central bank affect, first and foremost,the way that private agents form their expectations about the future behavior of thecentral bank. Consequently their expectations will be reflected through inflation. Toexamine the link between inflation and inflation expectations, we apply theframework used by Levin et al.(2004) and make use of the recent development ofquantitative measures for transparency(E&G index). We find evidence thattransparency helps anchor private sector inflation expectations.Based on theoretical and empirical findings, we discuss the path selection toimprove the transparency and the optimal transparency for central bank. But theimprovement of the transparency of central bank is a long and complex systemsengineering. We try to put forward some policy suggestions.