A week after Søren Kierkegaard, it was Ludwig Wittgenstein’s turn to be quoted by Christine Lagarde — this time in a speech about how difficult it is for policy makers to “cut through” to the general public:
Communication plays a vital role in the art of effective policy making today, and this is especially true for central banks like the ECB. But several changes in the media landscape – from new technologies to the rising tide of fake news – have made it increasingly difficult for policymakers to “cut through” to the wider public.
In other words, just as the need for effective communication has grown, so too has the difficulty for policymakers to make their voices heard. This is a problem that we cannot afford to ignore. As Ludwig Wittgenstein once observed, “the limits of my language mean the limits of my world”.
There’s nothing wrong with central bankers quoting clever people. But Wittgenstein? He was so opaque that Marie McGinn, emeritus professor of philosophy at the University of York, said we should not be surprised “if on first reading [Wittgenstein’s masterpiece Philosophical Investigations] we cannot see the point of [his] remarks”.
Here’s a worthy-sounding take: engaging with as broad a swath of the public as possible is a key part of any central banker’s job. Unelected bureaucrats ought to be accountable for the important decisions they make, and the stories they tell (like Mario Draghi’s “whatever it takes” speech in 2012) have the power to change the course of economic history.
And here’s an alternative view: none of it’s worth the hassle. “Central banks will keep trying to communicate with the general public, as they should. But for the most part, they will fail”, said Alan Blinder, former vice chairman of the board of governors of the Federal Reserve. Decades earlier, Montagu Norman, governor of the Bank of England from 1920 to 1944, summed up his approach to policy communication in four words: “never explain, never excuse”.
Lagarde puts herself in the first camp, even as two interrelated factors — “the ever-increasing competition for attention” and “an overarching decline in trust” — conspire to make her job trickier.
She needn’t fear, for help is at hand: there’s a dummies’ guide to help navigate these unique 21st century challenges.
Behold (from her old employer, no less): the IMF Monetary and Capital Markets Department’s Technical Assistance Handbook for Central Bank Communications (updated January2022).
Over 34 pages, the handbook explains why communication should be clear and concise, tiered to different audiences, delivered regularly, made equally accessible and use as little jargon as possible.
Transparency is a quantifiably good thing, the pamphlet notes:
Moving from a level of transparency equivalent to that of the Reserve Bank of India — which in 2010 (before the adoption of the inflation targeting framework) was near the bottom of the pack — to that of Sweden, at the top of the pack, reduces inflation variability by 3 p.p. and inflation by 11 p.p., all else being equal.
With the basics out the way, the guide starts to get into the nitty gritty. “Conventional” forward guidance, it says, refers to the sort of projections for the future policy rate based on what’s known at the time. Yawn.
Then there’s the cooler, “unconventional” kind of guidance — which tends to be used “irregularly, in a somewhat opportunistic way, whenever policymakers feel a stronger need to influence markets”. Presumably this mystery box approach would stretch to Andrew Bailey leading a singalong at an MPC press conference, or Jerome Powell popping up on SNL.
If this binary’s too abstract, others are available [their emphasis]:
Whether conventional or unconventional, forward guidance can be classified into two categories: “Delphic” and “Odyssean.” The former consists of announcing the expected future path of official interest rates; the latter also involves a conditional commitment to the announced monetary policy stance. The main argument in favor of the Delphic approach is that the policy rate must be free to respond to all possible contingencies without risking the central bank’s reputation by having its previous plan interpreted as a mistake. At the same time, by refusing to commit to predetermined actions, Delphic forward guidance may be less effective in moving inflation expectations and asset prices.
Delphic messaging is all about conveying monetary policy when seas are calm, according to the Chicago Fed. Whereas Odyssean guidance is grounded in how everything changed after 2008 — when the Fed’s multitrillion dollar asset purchase programs and zero-interest rate policy left rate setters, like Odysseus, bound “to the mast of a time-inconsistent policy”. Clear enough?
Moving swiftly on, chapter four — “To Whom to Communicate?” — is as pompous as it sounds. Emphasis our own:
The amount of resources dedicated to communication tends to increase with the degree of heterogeneity of the desired audience. Different levels of economic literacy among the public or even the particular interest in the central bank’s messages will result in the need of specifically tailored messages. This raises the question of whether the central bank should target some specific groups. The answer should consider that, whereas a deep understanding of monetary policy instruments and strategies may matter only for the financial community, the average citizen is certainly worried about inflation and in most cases, the exchange rate. Left on their own, they often believe in and propagate distorted views on the evolution of those variables and how they influence their lives.
Ouch. Central bank watchers in financial institutions, media or academia, on the other hand, “have the necessary technical background and expertise” to interpret central bank smoke signals. Is this true? Doesn’t matter. Policymakers “must establish good relationships” with these superior beings and “keep them close”.
To be fair, the ECB under Lagarde has, as mainFT writes, “sought to use less technical language and reach a wider audience beyond financial market specialists”.
How does that look in practice? “The outcome of our strategy review has helped in this regard,” Lagarde said. “Our inflation target of 2% – which came into effect in 2021 – is simpler, clearer and easier to communicate than our prior inflation aim of ‘below, but close to, 2%’.”
The central bank also aspires to speak more frankly about its forecasting limitations and admit more openly to previous mistakes, and in so doing restore some of the trust that evaporated following the GFC. Nothing wrong with that.
After all, “it is not only about getting policy right — we also have to talk about it in the right way”, Lagarde concluded. “So let us seize the moment. And I have no doubt we can do so effectively by embracing accessibility and humility in how we pursue and communicate our monetary policy to the citizens of the euro area.”
Translation: be sure to brush up on your Hegel before the ECB’s pivotal rate announcement next week.
Further reading
— A new birding guide for central bankers
Source: Economy - ft.com
