Comments and Discussion

Benjamin M. Friedman: A firm belief in the miraculous healing power of central bank transparency is a core tenet of the new religion that the economics of monetary policy has somehow become. In the rush to dissociate themselves from the long-standing practices of their predecessors (and, one sometimes suspects, to avoid talking about their actual policy decisions), central bankers today tirelessly repeat the mantra that open communication with the public is fundamental to carrying out their assigned task. Economists reiterate the same conviction, albeit with little or no more analytical grounding to indicate just why, or how, enhanced transparency delivers the wonders claimed for it.

Stephen Morris and Hyun Song Shin, in an interesting series of papers, have ventured the heresy that perhaps, under some conceivable circumstances, less transparency might be better than more. The question is plainly worth consideration. But wholly apart from whatever answer they may provide to the question of how much transparency is "just right," the potential value of Morris and Shin's work lies in the effort to spell out how central bank transparency matters in the first place. That alone would constitute a significant contribution to the discussion.

Morris and Shin nicely situate their inquiry within the broader setting of economic theory by appealing to the debate, which they personify in Hayek and Lange, over the informative value of prices. To understand how the beneficial value of central bank transparency has come to be such a core belief of current-day monetary economics, however, I think it is also useful to situate this subject in the context of the still broader debate over the social optimality of unfettered private market behavior. Monetary policy has always presented something of a challenge in this regard. Even such dedicated free-market advocates as Milton Friedman have strongly defended the central bank's role as a necessary deus ex machina, exogenously fixing some economic magnitude (for Milton Friedman it was the money stock; today we more typically think of a short-term interest rate, although this is problematic in yet other ways) so as to anchor the nominal price level. The nominal price level is not a matter of economic significance, but rather a convention: a social artifact. Hence private markets require some outside agent to establish its basis. Since the provision of a monetary standard (itself a social artifact) is traditionally a well-recognized responsibility of the state, the role of anchoring the system of nominal prices inherent in a monetary economy likewise falls to the state, or more typically to one of its constituent agencies.

The resulting tension between belief in the social optimality of unfettered private market outcomes and the required reliance on a government agency is an underlying theme that pervades the writings not only of Milton Friedman but of countless others in this vein as well. Much of the literature dealing with monetary policy consists of pointing out how poor decisions on the part of the government, in this case the central bank, have brought about this slump, or that inflation, or whatever other economic misfortune might have occurred. The source of the tension is that the standard laissez-faire remedy—simply have the government go out of business—is unavailable in this setting because of the need to establish the nominal price level. Apart from advocates of free banking, who have always remained on the fringe of the subject, the normal form of analysis in this field therefore consists of comparing actual central bank practice against some designated alternative.

Today's focus on central bank transparency is a further dimension of the ongoing effort to attribute whatever plainly nonoptimal economic outcomes occur to government action, rather than to any failure of optimality on the part of private market activity. In this case it is private actions that are nonoptimal, not government actions, but the argument is that it is the government that leads private economic agents to make mistakes. This avenue for finding the government at fault is especially appealing within the new approach to thinking about monetary policy according to which central banks never do anything anyway...