Derivation of Optimal Central Bank Transparency for Minimizing the Financial Market Volatility: A Case Study of the Selected States of Organization of Islamic Cooperation

Ehsani, MohammadAli; Farzinvash, Asadollah; Elahi, Nasser; Izadi, Reza

Derivation of Optimal Central Bank Transparency for Minimizing the Financial Market Volatility: A Case Study of the Selected States of Organization of Islamic Cooperation

Document Type : Original Article

Authors

MohammadAli Ehsani ¹

Asadollah Farzinvash ²

Nasser Elahi ³

Reza Izadi ⁴

¹ Associate Professor in Economics, Mazandaran University, Mazandaran, Iran

² Professor of Economics, University of Tehran, Iran

³ Associate Professor of Economics, Mofid University, Iran

⁴ Assistant Professor of Economics, Allameh Mohaddes Nouri University, Iran

Abstract

This paper aims to optimize the central bank transparency level which corresponds to the minimum of financial markets volatility in selected states of the Organization of Islamic Cooperation (based on the maximum data availability) during the period 2004-2014. Applying the Arellano-Bond GMM estimation and using the Dincer and Eichengreen index as a proxy of transparency. includes five aspects covering political, economic, procedural, policy, and operational transparency. This index ranges in numerical value from 0 to 15. The result indicates that an increase in the level of central bank transparency will decrease financial markets volatility up to a certain point, after which additional information from central banks begins to exacerbate it. Also, the effect of other variables (financial depth, past inflation and unemployment rate) on financial markets volatility was found positive. Therefore, moving with caution towards monetary policy transparency is recommended as financial markets volatility can be reduced considerably, implying significant benefits for financial stability.

Keywords

Central Bank Transparency

Financial Markets Volatility

Optimal transparency level

Generalized Method of Moments (GMM)

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