Macroeconomic Effects of Central Bank Transparency: The Case of Brazil

Nowadays there is a tendency for central banks to increase transparency in the conduct of monetary policy. Central bank transparency could be defined as the existence of symmetric information between monetary policymakers and other economic agents. High degrees of transparency reduce uncertainty, improve the private-sector inference about central bank goals, and increase the effectiveness of monetary policy. There is now an increasing literature that measures the effects of transparency on average inflation, output volatility (Chortareas, Stasavage, and Sterne 2002), the efficiency of monetary policy (Cecchetti and Krause 2002), and the volatility of financial markets (Ehrmann and Fratzscher 2005). Some empirical analysis highlights the advantages of transparency due to a fall in asymmetric information. Siklos (2000) analyzes the impact of Canadian central bank transparency on the uncertainty of financial economic agents through a change in kurtosis of some financial assets for different periods. The analysis of kurtosis is made around dates of changes in the basic interest rate and the publication of the bank's Inflation Report. Furthermore, Siklos subdivides the period under analysis taking into consideration the introduction of the inflation target and the bank's Inflation Report. His results indicate that, if there is clarity (central bank publishes quality information), an increase in central bank transparency reduces the uncertainty in the financial market. (1) Clare and Courtenay (2001) also studied the impact of central bank transparency on financial assets. They found that an increase in the Bank of England's transparency improved the efficiency of the financial market. There was an increase in the speed of reaction of financial assets to the bank's announcements of the basic interest rate. Muller and Zelmer (1999) evaluate whether the price of financial assets anticipates changes in the basic interest rate in the Canadian economy. Their analysis reveals that there was an increase in the anticipation of monetary policy action by economic agents after the central bank independence (operational). In this period, the variations in the past spreads are more sensitive to the changes in the date of monetary policy committee meetings than in the periods where the central bank does not have operational independence. The importance of central bank communication is highlighted by Bernanke (2004b) through a phrase published by the Federal Open Market Committee (FOMC): "In these circumstances, the Committee believes that policy accommodation can be maintained for a considerable period. " According to Woodford (2005), that phrase was responsible for a substantial fall in the interest rate in the futures market. When the information "maintained for a considerable period" was eliminated by the FOMC from the minutes, the interest rate returned to the previous level. Bernanke (2004a) strengthens the argument that in the case where the public does not believe in the central bank's explanations and forecasts, economic transparency and transparency on monetary policy decisions will no longer function as guides for the public's expectations. The main objective of this article is to analyze the impact of transparency at the Central Bank of Brazil (CBB) on macroeconomic variables. In particular, we consider the effect of the CBB's announcements and publications on several variables related to the inflation targeting system, including expectations. CBB Transparency and Macroeconomic Performance To evaluate the effect of CBB transparency on macroeconomic variables, we examine the behavior of the one-day interbank interest rate with payment in one month and three months (i.e., future contracts with interbank deposits). The data used in the analysis are from the Brazilian Mercantile and Futures Exchange for January 18, 2002, to March 13, 2006. (2) We consider expectations for the following variables: over-SELIC (basic interest rate) in the short and long run; inflation (measured by IPCA, the official price index); (3) public debt/GDP ratio; and the exchange rate. …