Keep talking

Last week, Bank of England chief economist, Andy Haldane, gave one of his excellent speeches which on this occasion provided a tour-de-force on the topic of central bank communications (here). He pointed out that just over twenty years ago, central banks were still concerned to maintain their mystique. Indeed, I well remember from my student days that much of the contemporary economic literature was focused on the extent to which central banks could influence policy by withholding their reaction functions from public view. Today, however, central banks are much more open institutions. According to Haldane, the BoE’s communications last year amounted to 4.5 million words, which is pretty impressive even by the standards of the Twitter age.

But what is the point of all this communication? Central banks in democratic societies believe that they have a duty to get their message across to as many citizens as possible. There is a certain logic to this: After all, even though most central banks are independent – albeit to varying degrees – they still have a duty to explain their actions to the people in whose name they are acting. One of the pioneers of such communications was the Bank of Canada in the 1950s whose governor, James Coyne, viewed BoC speeches and other reports as devices to explain monetary policy to the public but also as a tool to underpin the central bank’s credibility and reputation. Karl Blessing, President of the Bundesbank from 1958 to 1969, similarly argued that: “A central bank which never fights, which at times of economic tension never raises its voice ... will be viewed with mistrust.”

Of course, much of this effort is wasted if those at whom the information is aimed do not understand the message being conveyed. The BoE is acutely aware of this problem and it was highlighted in a post by Jon Fullwood on the Bank Underground blog last October (here) which demonstrated that BoE texts generally have a Grade 14 reading level, which is equivalent to that required by a second year university student. In any case, even if the message is understood, it may not be accepted – particularly at a time when trust in institutions is low. This raises an important question of whether trust and understanding are inextricably linked. It is likely, as Haldane points out, that  “change in the nature of public language – shorter, simpler, shriller – puts an even greater premium on institutions making themselves understood … That means speaking in words and sentences that land rather than levitate with the public, that connect rather than divide public opinion, that illuminate rather than darken public debate.”

Some might say that this is akin to dumbing down the message. But there is nothing wrong with a little dumbing down if it gets the message across – after all, those with more interest in the subject matter can always engage at a higher level if they have the desire to do so. In any case, the actions of managing the economy do not have to change at all – merely the way in which they are communicated. Central bank communication can, of course, be taken to extremes as Richmond Fed President Jeff Lacker found out this week following the discovery that he had communicated sensitive market information to an analyst (prompting his immediate resignation). Sometimes the phrase “too much information” takes on a new meaning.

But despite central bank efforts to ensure that they communicate as effectively as possible, sometimes I wonder whether they overdo it. Should central banks worry overly much about whether their every last utterance is understood by the ordinary citizen? A certain degree of financial literacy amongst the general public is desirable but many citizens manage just fine without much knowledge about what central banks are up to.

As for a market perspective, it sometimes feels like Say’s Law is in operation, with supply creating its own demand. In other words, the more information central banks give out, the more markets seem to want. I would not be at all surprised if at some point in the near future there are calls for live broadcasts of central bank discussions, or at the least a live Twitter feed. That said markets are much more trusting of central banks today. Gone are the days when markets used to interpret central bank actions as being motivated by any informational advantage which they enjoyed. This is partly the result of greater central bank openness – after all, the Fed has gone out of its way to avoid a repeat of the actions which prompted the bond crash of 1994. But it is also to do with the communications revolution which means that markets and central banks operate with similar information sets.

Ironically, economists were originally employed in financial markets to interpret the actions of opaque central banks. I well remember a TV interview around 1990 in which Gavyn Davies was asked what the 1990s would hold for the City. His answer was something to the effect that he did not know but he ventured that by the end of the decade there would be fewer economists employed than there were at that time. He was wrong about that: But with central banks providing much more information and comment than they used to, it is possible that he will only be wrong about the timing.