Definition
Transparency means that the central bank provides the general public and the markets with all relevant information on its strategy, assessments and policy decisions as well as its procedures in an open, clear and timely manner.
Today, most central banks, including the ECB, consider transparency as crucial. This is true especially for their monetary policy framework. The ECB gives a high priority to communicating effectively with the public.
Transparency of the ECB’s monetary policy
Transparency helps the public to understand the ECB’s monetary policy. Better public understanding makes the policy more credible and effective. Transparency means that the ECB explains how it interprets its mandate and that it is forthcoming about its policy goals.
Credible
The ECB fosters credibility by being clear about its mandate and how it performs its tasks. When the ECB is perceived as being able and willing to achieve its policy mandate, price expectations are well anchored. Regular communication about a central bank’s assessment of the economic situation is particularly useful. It is also helpful for central banks to be open and realistic about what monetary policy can do and, even more importantly, what it cannot do.
Self-disciplined
A strong commitment to transparency imposes self-discipline on policymakers. It ensures that their policy decisions and explanations are consistent over time. Facilitating public scrutiny of monetary policy actions enhances the incentives for the decision-making bodies to fulfil their mandates in the best possible manner.
Predictable
The ECB publicly announces its monetary policy strategy and communicates its regular assessment of economic developments. This helps the markets to understand the systematic response pattern of monetary policy to economic developments and shocks. It makes policy moves more predictable for the markets over the medium term. Market expectations can thus be formed more efficiently and accurately.
If market agents can broadly anticipate policy responses, this allows a rapid implementation of changes in monetary policy into financial variables. This in turn can shorten the process by which monetary policy is transmitted into investment and consumption decisions. It can accelerate any necessary economic adjustments and potentially enhance the effectiveness of monetary policy.
