Uncertainty and central bank transparency: A non-Bayesian approach

We use a non-Bayesian approach to uncertainty, where “ambiguity” is taken into account, in order to analyze the issue of central bank transparency, and we underline that the use of such an approach may greatly change the results. We reconsider a specific argument against transparency found in the literature. We show that, in the presence of ambiguity, the argument can become a case in favor of transparency, which seems more in accordance with some stylized facts. Reduced Knightian uncertainty associated with increased transparency can contribute to making transparency beneficial.

► A non-Bayesian approach can change some existing results on central bank transparency. ► Ambiguity can make central bank transparency beneficial rather than harmful. ► Ambiguity can make political risk harmful rather than beneficial. ► Ambiguity can make Knightian uncertainty, due to the lack of transparency, harmful.