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Stephen Cecchetti, whose combination of extensive academic research and practical experience in international financial matters make his a particularly valuable opinion, has consistently noted not just the need for, but the inevitability of increased transparency in how Central Bank's formulate monetary policy. As he and his coauthor, Craig Hakkio, write in "Inflation Targeting and Private Sector Forecasts,"
"Transparency is one of the biggest innovations in central bank policy of the past quarter century. Modern central bankers believe that they should be as clear about their objectives as possible. This notion arises from the view that policymakers should be a source of stability, not a source of noise; with the economy and markets responding to data, not to the policymakers themselves."[October 2009]
Cecchetti is a proponent of a certain degree of transparency, but he is also cautious about how far central banks should go in being more transparent. As all economists and financial managers know, markets can be extremely volatile and sensitive to the slightest hint of the imminent appearance of market-changing information. There used to be an old adage about former Federal Reserve Chairman Alan Greenspan to the effect that, when Greenspan sneezes, Europe gets pneumonia. What this means is that the power of the chairman of the U.S. Federal Reserve to influence markets is so enormous that such individuals, whether Greenspan, Ben Bernanke, or any other chairman past or future are incentivized to be as secretive as possible lest they inadvertently cause markets to crash with an ill-conceived slip of the tongue.
That phenomenon has been dominant for decades, but major economic crises, going back to the so-called "Asian flu" of 1998, have resulted in increased demands for greater transparency in both public and private sector financial institutions. But Cecchetti understands that transparency, as far as central banks are concerned, can go too far: "You want to make sure that short-term monetary policy isn't responding to a phenomenon that is just going to go away in a few months, or even a year. A change in an interest rate today will have an effect on inflation one to two years from today." In other words, if the public has greatly expanded insights into the deliberations of central banks, then the chances of wild market fluctuations resulting from misinterpreted observations on the part of the public, or from a careless or misunderstood statement by a prominent central bank board member, increase dramatically.
Cecchetti's most oft-quoted statement, "You'll see more and more transparency for sure," is a prognostication, not a policy recommendation. As with most matters, a careful balance between transparency and secrecy needs to be maintained.
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