Macroeconomic effects of central bank transparency: the case of Brazil.

• Author: de Mendonca, Helder Ferreira

Nowadays there is a tendency for central banks to increase transparency in the conduct of monetary policy. Central bank transparency could be defined as the existence of symmetric information between monetary policymakers and other economic agents. High degrees of transparency reduce uncertainty, improve the private-sector inference about central bank goals, and increase the effectiveness of monetary policy. There is now an increasing literature that measures the effects of transparency on average inflation, output volatility (Chortareas, Stasavage, and Sterne 2002), the efficiency of monetary policy (Cecchetti and Krause 2002), and the volatility of financial markets (Ehrmann and Fratzscher 2005).

Some empirical analysis highlights the advantages of transparency due to a fall in asymmetric information. Siklos (2000) analyzes the impact of Canadian central bank transparency on the uncertainty of financial economic agents through a change in kurtosis of some financial assets for different periods. The analysis of kurtosis is made around dates of changes in the basic interest rate and the publication of the bank's Inflation Report. Furthermore, Siklos subdivides the period under analysis taking into consideration the introduction of the inflation target and the bank's Inflation Report. His results indicate that, if there is clarity (central bank publishes quality information), an increase in central bank transparency reduces the uncertainty in the financial market. (1)

Clare and Courtenay (2001) also studied the impact of central bank transparency on financial assets. They found that an increase in the Bank of England's transparency improved the efficiency of the financial market. There was an increase in the speed of reaction of financial assets to the bank's announcements of the basic interest rate.

Muller and Zelmer (1999) evaluate whether the price of financial assets anticipates changes in the basic interest rate in the Canadian economy. Their analysis reveals that there was an increase in the anticipation of monetary policy action by economic agents after the central bank independence (operational). In this period, the variations in the past spreads are more sensitive to the changes in the date of monetary policy committee meetings than in the periods where the central bank does not have operational independence.

The importance of central bank communication is highlighted by Bernanke (2004b) through a phrase published by the Federal Open Market Committee (FOMC): "In these circumstances, the Committee believes that policy accommodation can be maintained for a considerable period." According to Woodford (2005), that phrase was responsible for a substantial fall in the interest rate in the futures market. When the information "maintained for a considerable period" was eliminated by the FOMC from the minutes, the interest rate returned to the previous level. Bernanke (2004a) strengthens the argument that in the case where the public does not believe in the central bank's explanations and forecasts, economic transparency and transparency on monetary policy decisions will no longer function as guides for the public's expectations.

The main objective of this article is to analyze the impact of transparency at the Central Bank of Brazil (CBB) on macroeconomic variables. In particular, we consider the effect of the CBB's announcements and publications on several variables related to the inflation targeting system, including expectations.

CBB Transparency and Macroeconomic Performance

To evaluate the effect of CBB transparency on macroeconomic variables, we examine the behavior of the one-day interbank interest rate with payment in one month and three months (i.e., future contracts with interbank deposits). The data used in the analysis are from the Brazilian Mercantile and Futures Exchange for January 18, 2002, to March 13, 2006. (2) We consider expectations for the following variables: over-SELIC (basic interest rate) in the short and long run; inflation (measured by IPCA, the official price index); (3) public debt/GDP ratio; and the exchange rate. All data are from the CBB's Focus survey. Furthermore, to determine the reaction of the stock market to the CBB's publications, we use the Bovespa index (Ibovespa). The justification for using these variables is that they are intrinsic to the CBB's inflation targeting, and the Monetary Policy Committee (COPOM) takes them into consideration when evaluating the economy's future and in making decisions about the SELIC target. The impact of the CBB's main publications--COPOM minutes and the Inflation Report--on macroeconomic variables will be of primary interest.

When the central bank has political transparency the advantages from economic transparency and from transparency on monetary policy decisions become more evident. Hence, a period of political opacity is understood as that where there is uncertainty concerning the future behavior of monetary policy. This vision is observed in the Brazilian case. The CBB states in the Inflation Report (December 2002 and March 2003) that one cause of deterioration of the inflation expectation was the public's uncertainty about the future of monetary policy.

In general, the uncertainty is a consequence of the tradition of the Latin American left and the history of monetary policy in Latin America. Thus, people expect that prior to elections the monetary authorities will take actions to stimulate short-run output and employment. The political business cycle in Brazil was evident during the elections of 1986, 1989, and 1998. Hence, in evaluating the CBB's transparency and its impact on macroeconomic variables, we need to distinguish between the periods with opacity and with political transparency.

After the adoption of inflation targeting in June 1999, there was a period of opacity during the penultimate Brazilian presidential election. That opacity occurred because of the favoritism and the victory of Luis Inacio Lula da Silva, the candidate of the left party. The market was uncertain about his macroeconomic policies, given his trade union background and his softness on price stability. The reason for political opacity was the absence of legislation that would ensure the CBB's operational independence. In Brazil, there is only a tacit accord that gives operational independence for the CBB. In addition, the president of the republic appoints the members of the National Monetary Council, which sets the CBB's inflation target. Consequently, we shall label the period between May 31, 2002, and August 1, 2003, the period of political opacity (OP). In contrast, we shall label the period prior to May 31, 2002 (TRANI: January 1, 2001, to May 31, 2002) and the period after August 1, 2003 (TRAN2: August 1, 2003, to March 13, 2006) as having political transparency.

Table 1 presents the kurtosis for our data series taking into consideration all days in the period. We see that the kurtosis is lower during the electoral period compared with the other periods. This electoral period is marked by political opacity, meaning an increase in uncertainty in the conduct of monetary policy. This effect is observed through a low kurtosis concerning inflation expectations and, thus, an increase in the tradeoff between inflation and unemployment. In this case, the explanations and actions of the CBB did not produce the desired effect and control over inflation expectations was damaged.

Two other periods are analyzed: five days before and after the COPOM minutes and five days before and after the publication of the CBB's Inflation Report. The comparison between the publication of COPOM minutes and the Inflation Report for the period TRAN2 denotes that the kurtosis is higher for the variables that compose the inflation targeting around the date of publication of the Inflation Report. Therefore, uncertainty about the exchange rate (nominal), inflation, and the basic interest rate (short-run and long-run SELIC) is lower in a monetary regime having an Inflation Report. In the period of political opacity, however, the kurtosis is higher around the date of publication of the COPOM minutes. This result denotes a change in the behavior of economic actors who demand information with more frequency. (4)

Another way to analyze the effects of central bank transparency on macroeconomic variables is to apply the method used by Clare and Courtenay (2001). According to Clare and Courtenay (2001), the abnormal reaction is the difference...