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Derivation of Optimal Transparency of the Central Bank for Minimizing the Output Volatility: The Case Study of Organization of Islamic Cooperation

Author

Listed:
  • Ehsani , Mohammadali

    (Mazandaran University)

  • Farzinvash , Asadollah

    (University of Tehran)

  • Elahi , Nasser

    (Mofid University)

  • Izadi , Reza

    (Mofid University)

Abstract

This paper aims to optimize the Central Bank transparency level which corresponds to the minimum of output volatility in 28 states of the Organization of Islamic Cooperation (due to the maximum data availability) during the period 2003-2014. For this purpose, the Dincer-Eichengreen index is used, which includes five aspects covering political, economic, procedural, policy, and operational transparency. The index ranges in numerical value from 0 to 15 with 0 being the most opaque and 15 the most transparent. Applying the Arellano-Bond GMM estimation and using the Dincer-Eichengreen index as a proxy of transparency, the result indicates that an increase in the level of central bank transparency will decrease output volatility up to a certain point, after which additional information from central banks begin to exacerbate it. In addition, the effects of other variables (financial depth, first lag of inflation, oil rents-GDP ratio) on output volatility are positive. Therefore, moving with caution towards monetary policy transparency is recommended as output volatility is reduced considerably, implying significant benefits for output stability.

Suggested Citation

  • Ehsani , Mohammadali & Farzinvash , Asadollah & Elahi , Nasser & Izadi , Reza, 2017. "Derivation of Optimal Transparency of the Central Bank for Minimizing the Output Volatility: The Case Study of Organization of Islamic Cooperation," Journal of Money and Economy, Monetary and Banking Research Institute, Central Bank of the Islamic Republic of Iran, vol. 12(3), pages 345-367, July.
    • Handle: RePEc:mbr:jmonec:v:12:y:2017:i:3:p:345-367
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    More about this item

    Keywords

    Central Bank Transparency; Output Volatility; Optimal Transparency Level; Generalized Method of Moments;
    All these keywords.

    JEL classification:

    • E0 - Macroeconomics and Monetary Economics - - General
    • E4 - Macroeconomics and Monetary Economics - - Money and Interest Rates
    • F0 - International Economics - - General

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