Editors' Summary

The brookings panel on Economic Activity held its eightieth conference in Washington, D.C., on September 8 and 9, 2005. This issue of the Brookings Papers includes the papers and discussions presented at the conference. The first paper examines some possible drawbacks to greater transparency by central banks. The second analyzes the change in the income distribution that has accompanied the productivity surge of the past decade. The third studies how workers respond to information about risk in their retirement accounts. The fourth looks at the long-run interactions between energy needs and the environment. The issue concludes with a report that questions the widespread preference for the payroll data over the household data as a measure of monthly employment gains.

Central bankers and economists alike have increasingly come to believe that central bank communication and transparency are key to an effective monetary policy. For many this belief stems from the generally held view that long-term interest rates, which the central bank does not directly control, are the main link between monetary policy and the spending decisions of households and firms. Expectations about the path of future short-term rates, which the central bank does control, play a central role in determining long-term rates, and transparency regarding the setting of short-term rates is seen as increasing the central bank's ability to affect those expectations. These beliefs have led to increased openness in the conduct of policy. In 1994 the Federal Reserve's main policymaking body, the Federal Open Market Committee (FOMC), began the practice of immediately following each of its meetings with a public announcement, and the information content of those announcements has increased steadily since then. In the current recovery, for example, the FOMC's postmeeting announcements have indicated clearly the committee's intention to raise the federal funds rate, its principal short-term policy rate, at a measured pace over a sustained period. Accompanying these announcements has been a large increase in the number of public speeches by FOMC members, aimed at better informing the public on how the committee makes its judgments. Meanwhile the central banks of many countries other than the United States have adopted explicit inflation targeting. This policy is motivated by the same belief that the central bank should be more transparent and accountable to the public. In the first article of this issue, Stephen Morris and Hyun Song Shin analyze the subtle ways in which increased transparency affects public expectations and the information value of market signals. Although they support the notion that clear statements both of the central bank's view of the economy and of its policy intentions will move expectations closer to the bank's own view, they argue that, paradoxically, such statements may actually decrease the information content of market signals, to the detriment of both the central bank and private agents.

The authors begin with an extensive discussion of the importance of informational efficiency to economic welfare. The efficacy of decisions by both private agents and the central bank depends on the accuracy of the information they have available. For example, informational efficiency plays an important role in determining the accuracy with which prices in financial markets reflect both business opportunities and resource scarcities. For central banks the primary issue is how transparency affects the prices relevant to the allocation of capital across time, rather than across firms or industries at a given moment in time. The authors describe the importance of the yield curve in affecting the duration of investment projects, the effect of long-term rates on the housing market, and the sensitivity of investment to stock prices.

Efficient information is important not just for the signals it provides to private agents, but also for the guidance it provides for the central bank's own decisions. The authors observe that, in order for the central bank to steer the economy in the right direction, it must have good information on the current state of the economy—in particular, how close the economy is to capacity—and on its likely course in the future. This includes not just information about asset...