The role of transparency in central-bank strategy.
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During the past five years - in line with the logic of inflation targeting and following international best practice - the National Bank of Hungary has been moving towards a greater degree of transparency. The evolution of the international best practice can be explained by the fact that in the past decade, views on the desirability of central-bank transparency have changed to a great extent. In the past, several central banks explicitly aimed to operate discreetly, but a general tendency towards increased transparency can be seen since the beginning of the 1990s. Calls for increased transparency may come from two directions. On the one hand, a democratic political setup requires public accountability of decision-makers at independent central banks, while on the other, economic thinking in the last decade has robustly inferred that central-bank transparency can preclude the emergence of inflation bias, increase the effectiveness of monetary policy, and under some conditions, have a welfare-enhancing effect. The study examines the validity of the latter assertions with two simple models often applied in transparency literature. It illustrates that the right degree of transparency can be subject to debate in theoretical and in practical terms. Finally it shows how transparency practice has evolved at the National Bank of Hungary since inflation targeting was introduced.
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