The hidden cost of transparency pledges

Leaders often make pledges of transparency to signal honesty and instil confidence. But what if they instead are sowing seeds of doubt? In a recent paper examining Federal Reserve communications, that’s exactly what I found. The study analyses seventeen years of speeches by the Fed chair, and looks at the effect these speeches have on the VIX Volatility Index, or “fear gauge.” What I show is that the more the chair tried to calm the market by being transparent about their objectives and policy framework, the more volatile the market became.