Transparency and central banking: More data, less gumption

THE Federal Reserve is “the most transparent central bank to my knowledge in the world,” claims its chairwoman, Janet Yellen. Transparency is a commonly prescribed remedy for all manner of governmental failings. But is it always beneficial? A recent paper suggests that greater openness may turn central bankers into politicians, who show off their knowledge of economic data but are timid about recommending policy.The paper uses a natural experiment involving meetings of the Federal Open Markets Committee (FOMC), the panel that sets interest rates. In 1993 the Fed, pressed by Congress to make its proceedings less opaque, not only promised to publish transcripts of the FOMC’s future meetings, but also opened up its archive. Transcripts of earlier meetings had never been intended for public release; members of the FOMC were not even aware that such records had been retained.The transcripts before 1993 display an FOMC unburdened by the knowledge that their deliberations would one day be on the record. Conversely, from 1993 all participants knew that their input would eventually be made public. The new study compares the two periods to see what impact the new transparency had.Using a linguistic algorithm, the authors identify discussions of economic policy (as opposed...

from The Economist: Finance and economics http://ift.tt/1mJ57MW