Discussion Paper Series 2021-E-12

Central Bank Transparency and Disagreement in Inflation Expectations

Shunichi Yoneyama

This paper measures the transparency of the Federal Reserve Board (FRB) regarding its target inflation rate before its adoption of inflation targeting using data on the disagreement in inflation expectations among U.S. consumers. We construct a model of inflation forecasters employing the frameworks of both an unobserved components model and a noisy information model. We estimate the model and extract the transparency of the FRB regarding the target as the standard deviation of the heterogeneous noise in the inflation trend signal, where the trend proxies the FRB's inflation target. The results show a great improvement in transparency after the mid-1990s as well as its significant contribution to the decline in the disagreement in long-horizon inflation expectations.

Keywords: Central bank transparency; forecast disagreement; inflation dynamics; imperfect information

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.

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