Central Bank Transparency and Financial Market Expectations: The Case of Emerging Markets
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Abstract
In this paper, we study how central bank transparency influences the formation of
money market expectations in emerging markets. The sample covers 25 countries for
the period from January 1998 to December 2009. We find, first, that transparency
reduces the bias (the difference between the money market rate and the weighted
expected target rate over the contract period) in money market expectations. The effect is larger for countries with no exchange rate peg and countries with low income. Second, an intermediate level of transparency is found to have the most favorable influence on money market expectations: neither complete secrecy nor complete transparency is optimal. Finally, all subcategories of the Eijffinger and Geraats (2006) index lead to a smaller bias in expectations, with political transparency having the largest effect.
Keywords
Interest Rates, Central Bank Transparency, Money Market., Financial Market Expectations, Emerging Markets, Monetary Policy