Communication, decision-making and theoptimal degree of transparency of monetarypolicy committees

This paper develops a theoretical model of dynamic decision-making of a monetarypolicy committee with heterogeneous members. It investigates the optimal transparency,and the optimal way of transmitting information of committees, by analysing the effectsdifferent communication strategies have on financial markets. It is shown that thecommunication strategy of the central bank committee has a significant effect on thepredictability of monetary policy decisions when there is asymmetric informationbetween the committee and market agents. Transparency about the diversity of views ofthe committee surrounding the economic outlook makes future monetary policy morepredictable. However, communicating the diversity of views regarding monetary policydecisions may lead to less predictability of monetary policy in the short term. In addition,it is shown that communication in the form of voting records has the greatest effect onmarket participants' near term policy expectations. These results support findings of theempirical literature and have strong implications for the optimal communicationstrategies of committees including the question whether individual voting records should be published.[...]