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Number 018

It is very appropriate that a conference on monetary policy transparency begin with a paper by Alex Cukierman. His 1986 paper with Allan Meltzer was the first modern treatment of transparency and the model developed in that paper continues to serve as the basic framework for much of the recent work in this area. Economists at most major central banks seem to feel the average inflation bias that occupied so much space in academic journals has been conquered. Whether it is because they now know to just do the right thing (McCallum 1995), because they target only the natural rate of output (Blinder, 1998; Svensson, 1999), or because they have gained reputations as inflation fighters through increased transparency and greater accountability is less certain. While many central banks have adopted operating procedures that are designed to provide the public with clearer and more complete information about policy decisions, and this increased transparency is often cited as critical for inflation targeters, Cukierman argues that transparency is still incomplete. This is true even among central banks that are quite transparent along some dimensions, publicly announcing inflation targets, for instance. This incompleteness limits the ability of the public to hold monetary policymakers accountable for their actions. Cukierman highlights two aspects of the policy environment that remain opaque—models and objectives. Emphasizing the role of objectives in the second half of his paper, Cukierman explores the implications for inflation of asymmetric preferences and, specifically, the case in which, at a given inflation rate, output expansions are viewed as beneficial while contractions are viewed as costly. Cukierman notes that the different notions of the output gap implicit in alternative models is one source of policy opaqueness. First, I want to develop more formally the distinction between alternative measures of the output gap and argue that different economic models and different definitions of the

This paper estimates a simple structural model of monetary policy in the UK focusing on the policy of inflation targeting introduced in 1992. Our main findings are: (i) the adoption of inflation targeting in 1992 led to significant changes in monetary policy; (ii) monetary policy post-1992 is asymmetric as policy makers respond more to upward deviation of inflation away from the target; (iii) in the post-1992 period policymakers may be attempting to keep inflation within the range of 1.4%-2.6 % rather than pursuing a point target of 2.5 % and (iv) the response of monetary policy to inflation is nonlinear as interest rates respond more when inflation is further from the target.

This essay presents estimates of the monetary policymakers' preferences of the Euro Area, using quarterly aggregate Area data for 1972-2001. The analysis is motivated by the observation that the tradeoff between the volatility of inflation and the volatility of the unemployment gap has improved, in the Euro Area, since the second half of the 80s. This research tries to evaluate the role played by the three possible sources for this improvement: (i) change in the policy regime; (ii) increased efficiency in the conduction of policy; and (iii) decrease in the exogenous supply shocks buffeting the Area. Based on the macro and policy record of the EMU member-states we put forth the hypothesis that an important part of the explanation for the volatility fall lies in the emergence of a well-identified policy regime in the Area after the mid 80s. Specifically, we test for a well-identified central bank loss function, inflation target and equilibrium real interest rate, in the Area, since 1986. We try to add four results to the ongoing research on policymakers ’ preferences: First, we obtain evidence on the Euro Area policymakers preferences, with a framework that simultaneously estimates the structural model of the macroeconomy and the deep preferences parameters (loss function coefficients) of the Area central bank. Second,