Does central bank transparency affect stock market volatility?

Abstract

This paper addresses the issue of impacts of central banks' transparency on stock market volatility. Using a simple theoretical macroeconomic model, we analytically find a negative link between stock prices volatility and central bank transparency. By applying panel data analysis on a set of 40 countries from 1998 to 2005, sufficient evidence for this negative relationship is provided, using three different measures of stock market volatility. Therefore, moving towards monetary policy transparency is recommended as stock market volatility can be reduced considerably, implying significant benefits for financial stability. (C) 2014 Elsevier B.V. All rights reserved.