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In the recent past, few central banks would have placed
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Updated on: 10 May 2021, 08:46
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In the recent past, few central banks would have placed heavy emphasis on maximizing public understanding. Moreover, there is no general presumption that increasing common knowledge in society improves welfare. The transparency literature is rife with examples where this is not the case, for example, Faust and Svensson.
Indeed, much of the transparency literature can be viewed as a study of when it is and is not optimal for the central bank to surprise the public deliberately. This conventional transparency literature does not address three arguments in favor of clear communication that are stressed by ITF advocates and many other commentators.
First, as Greenspan states, "Openness is an obligation of a central bank in a free and democratic society." A great many conservative and liberal economists have supported this view. Deliberately surprising the public, even for its own good, is not the proper role of a central bank, in this view.
The second reason for clarity is that, as Lucas makes clear, what constitutes optimal policy is inextricably linked with public expectations about policy. The effects of a given policy action are not even defined without a treatment of policy expectations. More recently, discussions of the liquidity trap have reminded us of this point. The liquidity trap case drives the point home because, under certain assumptions, expanding the monetary base in a liquidity trap has no direct effects on the economy. Any effects result from changes in expectations.
Lucas argues that, even away from the liquidity trap, both the agent's problem and the central bank's problem in practice are intractable unless the public understands what the central bank is doing. An assumption about public understanding of the future course of policy is a precondition for coherent analysis of current policy.
The third argument in favor of clear communication is that it may alter incentives in a beneficial way. Many variations of this idea have been studied in the political economy literature.
According to the passage, Faust and Scensson would most likely agree with which of the following statements?
A. Clear communication is a key to altering incentives in beneficial ways B. Public expectations should be taken into account when setting fiscal policy C. The liquidity trap is invalid in current economic thinking D. There are many circumstances where it is appropriate for central banks to obscure the activities E. Conventional transparency literature is no longer valid in modern economic planning
Originally posted by Farina on 25 Aug 2020, 20:17.
Last edited by tapas3016 on 10 May 2021, 08:46, edited 3 times in total.
Re: In the recent past, few central banks would have placed
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19 Nov 2022, 11:17
Hello from the GRE Prep Club VerbalBot!
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