Transparency and output stability: Empirical evidence

This paper focuses on the empirical link between monetary policy transparency and output volatility. The questions addressed are: (i) Does transparency about policy processes stabilize output? (ii) Do different aspects of transparency differ qualitatively or quantitatively in terms of their effects on output volatility? Controlling for many standard structural sources of output stability, and using a data set of 80 countries over 1998 to 2007, our results show that transparency has a stabilizing influence on output volatility. However, it has less influence on output volatility than other structural sources of stabilization. Further, among the dimensions of transparency we find that operational transparency (covering control errors and macroeconomic disturbances) has the most robust stabilizing effect on output volatility. Whenever significant, political transparency (covering prioritization of objective and institutional arrangements) tends to increase output volatility, whereas other components have insignificant or negligible influence.