Central bank communication: Inflation target transparency with fiscal policy

This article examines the impact of opacity in announcing the central bank's inflation target on macroeconomic volatility and welfare, considering the interaction between an independent central bank and a fiscal authority. Our findings suggest that a key factor influencing the effects of central bank transparency is the relative importance placed by the central bank, compared to the government, on output stabilization versus inflation stabilization. Specifically, when output stabilization is relatively more important for the central bank than for the government, full opacity may benefit the central bank, but not necessarily society as a whole.