Jan F Qvigstad: Trends in monetary policy transparency – comments on Petra M Geraats' paper Speech by Mr Jan F Qvigstad, Deputy Governor of Norges Bank (Central Bank of Norway), at the conference "International Experience with the Conduct of Monetary Policy under Inflation Targeting", hosted by Bank of Canada, Ottawa, 24 July 2008. The Charts in PDF-format can be found on the Norges Bank’s website. *  *  *  The paper by Petra Geraats provides an up-to-date and thorough analysis of the trends in transparency during the last ten years. Her analysis confirms the general trend of improved transparency, but she also provides an interesting analysis of the differences across alternative monetary policy regimes. I am sure Petra’s paper will be a key reference in future research and policy discussions on transparency. 1 As discussed in the paper, transparency can be motivated both by accountability requirements for independent central banks, and by the purpose of enhancing the effectiveness of monetary policy. Both have been important factors behind the process in Norges Bank towards increased transparency. It is now widely accepted that monetary policy works mainly through private agents’ expectations. The widespread influence of the New Keynesian model in academic research on monetary policy and the trend towards using DSGE models in central banks have underpinned the focus on expectations. Michael Woodford puts it in a clear-cut way: 2 “For not only do expectations about policy matter, […] very little else matters”.
However, since no central bank follows a specific reaction function mechanically, it would be misleading to present a single reaction function specified mathematically. Judgement is always applied when responding to shocks, and a specific reaction function will give a very simplified representation of the reaction pattern. There is thus a trade-off between misleading precision and uninformative generality. Norges Bank tries to balance this trade-off by applying various approaches to communicating the reaction pattern. 2  BIS Review 94/2008  First, the Bank presents alternative scenarios in the Monetary Policy Report. Chart 2 illustrates the interest rate response to a positive and negative shock to inflation respectively. The exact specification of the shocks in the illustrations can differ somewhat from one Report to another, but the shifts in the interest rate, and the corresponding scenarios for inflation and the output gap give an indication of how the Bank responds. The shifts are specified such that, if shocks of the same type and size should occur, the alternative interest rate path is the Bank’s best estimate of how the interest rate would be set in such a situation. In addition to presenting policy reactions to new developments, the Monetary Policy Report includes an account of the disturbances that have lead to a change in the interest rate forecast from the previous Report. For example, we see from Chart 3 that our interest rate forecast was revised upwards in the Monetary Policy Report 2 published in June. The shocks contributing to this revision are illustrated in Chart 4.