On Fed Watching and Central Bank Transparency

Abstract

In this paper, I examine central bank transparency in two different general equilibrium settings. A transparent central bank eliminates any uncertainty about future money growth. Agents can expend resources to process messages about future money growth, which is labelled fed watching. So transparency is equivalent to a case in which a private agent processes all of the central bank's messages and correctly infers what the future money growth rate will be. In both settings, conditions are derived in which a proper subset of messages are processed. In one setting, this outcome reflects the central bank's efforts to be secretive. In the other, the central bank is opaque because the absence of transparency is the key to letting a benevolent central bank follow a state-contingent rule.