Central bank transparency prevents economic chaos and stabilizes expectations.
Central bank transparency in communicating its policy rules can greatly impact how people and the economy behave. When a central bank is clear about its rules, it helps stabilize expectations around the inflation target, leading to a more stable economy. Without this transparency, the economy can experience unpredictable swings between low output and deflation, and high economic activity with excessive inflation. This study shows that clear communication from central banks is crucial for preventing harmful fluctuations in the economy.