Central Bank Transparency, the Accuracy of Professional Forecasts, and Interest Rate Volatility

Central banks worldwide have become more transparent. An important reason is
that democratic societies expect more openness from public institutions.
Policymakers also see transparency as a way to improve the predictability of
monetary policy, thereby lowering interest rate volatility and contributing to
economic stability. Most empirical studies support this view. However, there are
three reasons why more research is needed. First, some (mostly theoretical) work
suggests that transparency has an adverse effect on predictability. Second,
empirical studies have mostly focused on average predictability before and after
specific reforms in a small set of advanced economies. Third, less is known about
the effect on interest rate volatility. To extend the literature, I use the Dincer and
Eichengreen (2007) transparency index for twenty-four economies of varying
income and examine the impact of transparency on both predictability and market volatility. I find that higher transparency improves the accuracy of interest rate forecasts for three months ahead and reduces rate volatility.