Central bank transparency reduces uncertainty and boosts welfare in monetary policy.
The article explores how central banks can deviate from their usual inflation-stabilizing policies, and how people react to these deviations. When deviations are short, people are confident they will return to normal quickly, leading to low uncertainty and high welfare. But if deviations last longer, uncertainty grows, and welfare decreases. When the duration of deviations is announced, uncertainty decreases, improving welfare. Transparency in central bank actions reduces uncertainty and increases overall welfare.