Question

People in general welcome actions that maintain effective communication and promote transparency, in particular when these involve public or quasi-public institutions. Can you think of a reason why a more transparent communication strategy might be detrimental to a central bank’s objectives?

Short answer

Too much transparency ties the central bank's hand and it is forced to commit to the announced policy otherwise it risks losing trustworthiness.

Step-by-step solution

Step 1. Introduction 

The central bank is the apex monetary authority in the economy. It is responsible for many tasks including formulation of monetary policy, controlling money supply, etc.

Step 2. Explanation 

Transparency is a desired feature of a central bank's policymaking. It is often welcomed by the general public. However, too much transparency can also be harmful to a central bank. If a central bank announces its policy, it can be forced to commit to it. Not following a policy after making an announcement can be harmful, as it may cause the general public to lose trust in the central bank. Trustworthiness is a significant element in monetary policy and not following policy would risk it.