Jon Faust, Federal Reserve Board and
Lars E.O Svensson, Princeton University, CEPR and NBER
Journal of Money, Credit and Banking 34 (2002) 520-539
First draft: August 1998This version: December 2000
We examine a central bank’s endogenous choice of degree of control and degree of transparency, under both commitment and discretion. We argue that discretion is the more realistic assumption for the choice of control and that commitment is more realistic for the choice of transparency. For the choice of control, under discretion maximum degree of control is the only equilibrium. For the choice of transparency, under commitment, a sufficiently patient bank with sufficiently low average inflation bias will always choose minimum transparency. Thus, a maximum feasible degree of control with a minimum degree of transparency is a likely outcome. The Bundesbank and the Federal Reserve System are, arguably, examples of this.
JEL Classification: E52, E58