Central bank transparency and financial stability

• We develop an index of how transparent central bank are about safeguarding financial stability.
• The central banks that have a transparent monetary policy show increased transparency in their framework for financial stability.
• There is an optimal level of transparency to minimize financial instability.

We develop a comprehensive index of the transparency of central banks regarding their policy framework to safeguard financial stability for 110 countries from 2000 to 2011 and examine the determinants and effects of this transparency. We find that the degree of transparency increased in the 2000s, though it still varied greatly across the countries in our study. Our regression results suggest that the central banks that have a transparent monetary policy are more likely to show increased transparency in their framework for financial stability. More developed countries exhibit greater transparency, past episodes of high financial instability have a negative effect on transparency and the legal origin matters, too. In line with theoretical literature, our results also suggest a non-linear effect of central bank financial stability transparency on financial stability. If transparency is too high, it is not beneficial for financial stability.