This paper extends the literature by developing an objective market-based index, which is dynamic and continuous and can be used to measure the monetary policy transparency for a country or, simultaneously, a series of countries. It was found that the agents in the money market are forward looking and that the more transparent the monetary policy is, the less risky and volatile the money market will be. Furthermore, during the tenure of Chairman Greenspan, the volatility and risk in the money market fell. The policy regime changes of adjusting the target rate by multiples of 25 or 50 basis points and including a balance-of-risks sentence in FOMC statements also resulted in a reduction in volatility in money markets.

Additional Metadata
Keywords Monetary policy transparency, forward-looking agents, risk, volatility, money market
JEL Determination of Interest Rates; Term Structure of Interest Rates (jel E43), Money Supply; Credit; Money Multipliers (jel E51), Monetary Policy (Targets, Instruments, and Effects) (jel E52), Central Banks and Their Policies (jel E58)
Publisher Department of Economics
Series Carleton Economic Papers
Kia, Amir. (2005). Developing a Market-Based Monetary Policy Transparency Index and Testing Its Impact on Risk and Volatility in the United States (No. CEP 05-02). Carleton Economic Papers. Department of Economics.