Central Bank Transparency and Interest Rate Volatility

ABSTRACT Most central banks around the world have increased their transparency in recent decades. These developments have had an impact on financial markets. Several studies have analysed the impact of central bank transparency (CBT) on variables such as inflation volatility, exchange rate volatility, or stock market volatility. One variable that has not received enough attention is interest rate volatility, despite its importance for decision‐makers in both financial markets and the real economy. The study uses a panel data set of a maximum of 93 countries over the years 1998–2017. We use panel data estimators (panel fixed effects and fixed effects filter). Our main findings are that CBT helps to reduce the volatility of several interest rates (money market rates, deposit rates, savings rates, Treasury bill yields and government bond yields), while it increases the volatility of monetary policy rates. The results are also significant from an economic point of view, as a small increase in CBT can reduce the variability of treasury bill rates by up to −8.2%, deposit rates by up to −9.1%, money market rates by up to −15.8% and savings rates by up to −20.4%.