Budget policy, conservativeness and the optimal degree of central bank transparency

By focusing on the “contingent” view of transparency, by introducing endogenous fiscal policy, and by treating information on the central bank’s (CB) preferences as an endogenous variable, we show that an increase in transparency always reduces inflation and output variance and that the behaviour of different CBs in information disclosure is different because the optimal degree of transparency varies with the institutional characteristics of the economy. Transparency is a substitute for credibility to discipline wage setters and the size of its effects increases with the degree of labour market distortion. If fiscal policy is inactive, for populist (conservative) CBs it is optimal to be fully opaque (transparent) because they (do not) need to rely on the wage discipline device represented by opacity. If the government aims at supporting employment through deficit spending, full transparency (opacity) remains optimal when the CB is perceived as conservative (ultra-populist), but if the CB is perceived as moderately populist, the optimal degree of transparency depends on the fiscal attitude of the government: when this is very active, it is optimal for the CB to be fully transparent; when the government faces a tight constraint on budget deficits, it is optimal to be fully opaque.