Commenting on British monetary policy in 1929, Otto Niemeyer, director of financial inquiries at H.M. Treasury, observed that —In prewar days a change in bank rate was no more regarded as the business of the Treasury than the colour which the Bank painted its front door.“ In 1987 William Greider entitled his expose of the Federal Reserve Secrets of the Temple. Since then the world of monetary policy has changed. Transparency now is a byword. Central banks are supposed to be open about their objectives, outlooks, policy strategies, and even their mistakes. The days when monetary policy deliberations were regarded as no more the business of outsiders than the color than the central bank chose to paint its door are now firmly in the past.

Or so it might seem. Assessing whether this move in the direction of policy transparency is permanent œ and if so how far it might go œ or whether it might be reversed requires understanding what lies behind the trend in the first place. One view is that transparency enhances the effectiveness of monetary policy. Transparency about monetary policy objectives, outlooks and strategies is necessary for effective communication with the markets, and effective communication is necessary for monetary policy to have stabilizing effects. Policy transparency makes it easier for observers to anticipate central bank actions and minimizes disruptions when policies change. It enhances the ability of policy makers to manage expectations, which is a key channel through which monetary policy affects outcomes. Transparency about not just current but also expected future policy gives the central bank leverage over long-term interest rates (which depend on expectations) and thus provides an important mechanism for influencing consumption and investment.