Does the degree of information a central bank releases to the public have any effect on the financial underpinnings of an economy? Does it actually matter whether Alan Greenspan explains the findings of an FOMC meeting to the American media, or remains quiet, letting the public ascertain the outcome on its own? Blinder [1998] argues that more open public disclosure of central bank policies may enhance the efficiency of markets. First, greater information about how a central bank makes policy decisions helps to reduce financial speculation. Second, clearer decision rules would help to reduce the volatility of markets, and thus enhance the predictability of future movements of financial assets. However, not everyone shares this view. Arguments have been made, claiming that too much information in the hands of the public could lead to, among other events, destabilizing speculation, and thus excess market volatility.
This issue is not confined solely to the United States. Australia has had in recent years an extremely transparent disclosure policy, and Japan has followed suit, to the point where weekly meetings are held between the head of the Central Bank and the press. The United Kingdom switched to a more open framework in 1992, citing a need to enhance the credibility of monetary policy. However, both France and the U.S. refuse to divulge too much information, such as the minutes of the actual meetings, citing possible financial instability.
One way to tell which view may prevail is to examine U.S. interest rates from 1986 to 1999. In 1994, the Federal Reserve System underwent a policy shift, and began announcing their targets for the federal funds rate on the afternoon of FOMC meetings. Previously, the Fed had left the public to guess at their actions (either by studying leading economic indicators, or by watching the federal funds rate in the days and weeks following the announcement), leading some economists and the media to label U.S. monetary policy a veil of secrecy3. After 1994, then, did markets become more efficient? Did the degree of uncertainty in rate movements lessen after 1994 in response to the additional information released by the Federal Reserve System? One benefit of analyzing the United States between the given time span is that Fed maintained a consistent stated policy of interest rate targeting. Thus, any change between 1986 and 1994, and 1994 and 1999, is due to either the increased disclosure policy or outside market forces.
We conduct our analysis by using time-series methods and postwar term structure data incorporated by Campbell and Shiller [1991]. We reexamine the efficient market hypothesis, and calculate 1) the MSE, 2) the correlation between the actual and theoretical spread, and 3) the ratio of the standard deviations between the actual and theoretical spread for different maturities. If more transparent monetary policies improve the efficiency of markets, we would expect the MSE to decline, and 2) and 3) to move closer to 1.0 since 1994 for all maturities as the actual spread more closely approximates the theoretically efficient spread. Our results are consistent with the conclusion that markets became more efficient after the change in FOMC operating procedures.
The paper proceeds as follows. In section 2, a brief history of this subject is outlined. Section 3 describes the paper’s methodology. Section 4 presents the results and offers policy recommendations. Section 5 concludes.
Download
PDF Ebook Central Bank Transparency and Market Efficiency: An Econometric Analysis
