Discussion Paper Series 2007-E-8

Productivity Growth, Transparency, and Monetary Policy

Ichiro Muto

In this study, we investigate how central bank transparency about views on future productivity growth influences social welfare. To this end, we use a New Keynesian framework in which both the central bank and private agents are engaged in filtering problems regarding the persistence of productivity growth. Since the central bank and private agents do not know the true value of the signal-to-noise ratio, the gain parameters used in the filtering problems can be heterogeneous. If the central bank is not transparent, private agents must conjecture the central bank's estimate of the efficient level of the real interest rate. Under this setup, we show that central bank transparency does not necessarily improve social welfare. It can potentially yield a welfare loss, depending on (i) the gain parameters used by the central bank and private agents and (ii) private agents' conjecture on the gain parameter used by the central bank. If the central bank is uncertain about the combination of these gain parameters, it is sensible for the central bank to respond strongly to the variations of the inflation rate, because the misperceptions about these parameters become the source of demand shock.

Keywords: New Keynesian Model; Monetary Policy; Transparency; Productivity Growth; Learning

Views expressed in the paper are those of the authors and do not necessarily reflect those of the Bank of Japan or Institute for Monetary and Economic Studies.

Copyright © 2007 Bank of Japan All Rights Reserved.

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