Czech governor breaks central banking communications etiquette as he receives award

Czech National Bank Governor Jiri Rusnok blundered when receiving the Central Bank Governor of the Year Award for Central and Eastern Europe 2017 by Global Markets for “managing the removal of a three-year cap on the koruna with a minimum of market disruption”.

In his acceptance address posted on the Czech central bank’s website, Rusnok — a former politician just over a year in the top job — said with a subtle half-smile on his face:

“Along with the Swiss National Bank and the Bank of Israel, the Czech National Bank is the only central bank in modern history to have used the exchange rate so significantly as the main instrument of monetary policy. As is well known, the Swiss exit didn’t go too well. The Swiss National Bank is certainly not winning any awards for it, nor it is likely to.”

With those words, Rusnok seemed to mock his Swiss colleagues for failing to engineer a smooth exit from their exchange rate floor in January 2015.

The unspoken convention of central banking communications has long been that central bankers from one country do not tell their colleagues from another country what kind of policy should they pursue, nor do they criticise publicly their policy actions and pronouncements.

Rusnok’s words could be seen as breaking the etiquette. Absolutely unnecessary.

Never ending debate: Does central bank transparency do more harm than good?

A paper by two Swiss National Bank economists has cast doubt on the benefits of greater central bank transparency and increased communication in enhancing the predictability of monetary policy.

Thomas Lustenberger and Enzo Rossi, in their paper titled “Does Central Bank Transparency and Communication Affect Financial and Macroeconomic Forecasts?”, conclude that central bank openness and too frequent talk by policymakers tend to confuse private forecasters, causing errors in their interest rate forecasts.

The paper provides yet another contribution into the seemingly endless debate among academics and practitioners about the benefits and drawbacks of the shift towards greater transparency and more frequent communication in central banking over the past two decades.

As one would intuitively expect, and I completely agree with based on my experience in working with a number of central banks across the developing world, the paper suggests that there is no single, one-size-fits-all model for transparency and that its effects that vary greatly across countries and variables.

That said, the paper makes a number of important points that are worth considering by policymakers and communication managers in developing countries’ central banks aspiring to raise their policy transparency and enhance communication.

Don’t expect wonders from greater transparency:

  • central bank openness is not an effective instrument to improve the accuracy of private forecasts;
  • the publication of voting records is even detrimental to the quality of interest-rate forecasts;
  • more transparency contributes to aligning single forecasts with each other. From this perspective, transparency seems to provide the anchor by which agents’ forecasting actions are coordinated.

Don’t presume more talk is always better than less talk:

  • the verdict about the frequency of central bank communication is unambiguous. More communication produces forecast errors and increases their dispersion;
  • speaking less may be beneficial for central banks that want to raise predictability and homogeneity among financial and macroeconomic forecasts. We provide some evidence that this may be particularly true for central banks whose transparency level is already high;
  • a higher turnover of governors tends to reduce the precision of interest-rate and inflation forecasts. Greater central bank independence also tends to worsen the quality of forecasts, perhaps by increasing the size of monetary policy committees that may lead to cacophony.

Policy implications of greater transparency and enhanced communication

“… the policy implications are not clear-cut. If the policy objective is to get forecasters to provide more-precise forecasts, our results suggest that transparency is not an adequate tool to achieve it. However, if the objective is to align individual forecasts, then the general normative implication seems to be an increase in transparency.”

“… in order to improve the quality of forecasts of variables that are central to monetary policymaking and align them among professional forecasters, central banks ought to speak less often, especially those that have already achieved a certain degree of transparency.”

Caveat: Don’t read too much into the results of this study…

One important caveat is in order, a point made by the authors themselves: The study and its framework cannot be seen as definitely answering the question whether more or less communication is desirable and whether the degree of transparency should be increased or lowered.

“Our paper only studies the effect of communication and transparency on forecast accuracy and dispersion. Although the impact of communication and transparency on this dimension is important, there may be many other beneficial (or harmful) effects of giving public speeches or being transparent on, for instance, accountability, the public’s understanding of monetary policy, and trust in the central bank.”

Very true. One can never underestimate the benefits of well-designed communication in promoting the understanding of monetary policy, and with it developing public trust in the central bank.

Norges Bank’s unconventional cod-themed video goes viral

Norges Bank became the world’s first central bank to tweet an interest rate decision in June 2009. Last week, the central bank of Norway's communications came to the forefront of the international attention again.

Its unconventional communication campaign featuring a fish-themed music video to spread the word about its redesigned 200-krone banknote with the cod as a dominant motif became an online hit internationally. Hundreds of thousands viewed the video on Facebook and YouTube within a few days.

The video traces the journey of fish from the sea to the printing presses to people’s wallets. It even features a cameo by central bank governor Øystein Olsen.

Many international viewers, including fellow central bankers, were amused by the video despite not being able to understand a word. A Norges Bank spokesperson responded to requests for English translation of the lyrics:

I am afraid this text will be lost in translation. There are a number of rhymes and references to Norwegian popular culture that are impossible to convey to an international audience.

Quite naturally, the primary audience for the music video were Norwegians who will be carrying the cod-themed banknotes in their purses.

Creativity of Norges Bank's communication department, which came up with the idea of using a remake of a 1980s comedy song to promote the new banknote, clearly paid off. Thanks to the international media buzz surrounding the music video, there are likely to be very few Norwegians who have not yet heard about the code on the 200-krone banknote.

Watch the video on YouTube below:

'The Old Lady of Threadneedle Street' at forefront of embracing new media

In yet another sign of central banks tailoring their ways of communicating to the new media, the 'The Old Lady of Threadneedle Street' invited members of the public to pose questions to one of the Bank of England’s policymakers on Twitter.

One particular question stood out, in my view, demonstrating the public’s increasing appetite for visual communications by central banks, which is an area where these traditionally text- and spreadsheet-based institutions have lagged behind:

Despite being quite well ahead of many other central banks, the Bank of England is still trailing its U.S. counterpart. At the Federal Reserve, some policymakers, notably Minneapolis Fed President Neel Kashkari, have extensively used social media accounts and blog posts to reach out directly to their audiences.

Chicago Fed lets people create their own currency in a bold move

You can now put yourself on a U.S. dollar. The Federal Reserve Bank of Chicago went as far as to create a special app for iPhone or iPad to allow people to put their own face on a bill.

The Chicago Fed app is part of a wave of entertaining online tools developed by central banks globally to help educate people about complex central banking matters. In this particular case, the idea is to help people learn some interesting things about the security features on currency.

Quite a courageous move by the Chicago Fed. I could very well imagine a central bank being either outright legally prohibited or simply too conservative and unwilling to allow users manipulate banknotes in such way, even on an smartphone screen.

Canada picks its first-ever Bank NOTE-able woman

Viola Desmond, an icon of the human rights and freedoms movement in Canada, will become the first Canadian woman to ever feature on a regularly circulating bank note. Her portrait will be printed on a new $10 Bank of Canada note, expected in late 2018. The selection of Viola Desmond was the final step in the #bankNOTEable campaign to choose an iconic Canadian woman to appear on this new bank note.

Bank of Canada Governor Stephen S. Poloz, in a release on the Bank of Canada’s website:

“It became clear that this search for an iconic woman was engaging Canadians in a very personal way.

Some people looked within their own profession: Engineers googled women engineers. Some of my economist colleagues searched for economists, computer scientists and statisticians. Some people looked at their alma maters—notable women of Queens, or Mount Allison or the University of British Columbia. Other people looked geographically, finding women who represented their part of the country. Teachers used the nomination process as a way to teach children about Canada’s history. School kids told us who they thought should be on the money.

With every mouse click or turn of a book’s page, with every kitchen table discussion or classroom debate, Canadians learned more about the women who built Canada.”

The Bank of Canada has, along with the Bank of Russia, become of the few central banks that have chosen to leverage the use of social media to let the general public have a say in the selection of a bank note design. Both provided useful case studies of how central banks may — at low costs — attract the attention of members of the general public to an issue concerning everyone's wallet, literally.

A communication gap between central bankers and the public

My former colleague, Czech central bank Vice-Governor Mojmir Hampl, in the OMFIF Bulletin on what he called a growing lack of understanding and a communication gap between central bankers and the public:

"... central banks have been warning about the risk of flooding for so long that they are now unable to explain that drought can be just as big a problem. They are also unable to explain that at times of drought you should water the garden, not keep draining it dry. And if the hosepipes are blocked, you must use other means to water the plants.

In tough economic times, it is difficult to describe quickly such a story to a public which is inattentive to the mysteries of complex systems. This is particularly true in the case of financially conservative and wealthy populations who strongly prefer future consumption to present consumption (and even more so in populations of net lenders rather than net borrowers like Germany, Austria or many other countries in central Europe).

This is the challenge which we, as a community of occasionally tedious central bankers, now face. We should hurry up."

Overcoming this challenge will be difficult, but hopefully not impossible...

Central bankers ignore public speaking rehearsals at their own peril

An important tidbit of information from this week’s post-FMOC press conference:

Fed Chair Janet Yellen clearly was well prepared to face journalists' questions about the U.S. election, and Donald Trump in particular. As an eagle-eye journalist pointed out, Yellen was apparently reading from a prepared statement when answering a question whether the Fed was keeping interest rates artificially low to support the Obama administration, as the Republican presidential nominee has charged.

United States Federal Reserve Chair Janet Yellen holds a news conference following the two-day Federal Open Market Committee meeting in Washington, U.S., September 21, 2016. (Reuters picture)

United States Federal Reserve Chair Janet Yellen holds a news conference following the two-day Federal Open Market Committee meeting in Washington, U.S., September 21, 2016. (Reuters picture)

Here is the relevant part of transcript of Chair Yellen’s press conference):

JON HILSENRATH. Jon Hilsenrath, from the Wall Street Journal. Chair Yellen, Donald Trump, the Republican presidential nominee has charged that the Fed is keeping interest rates artificially low to support the Obama administration. I'd like to hear what you have to say to that charge. And on a related note, I wanted to ask you about the Fed's next policy meeting which is in early November a week before the next election, given that the case for raising rates you say today has strengthened, should the public see that November meeting as a live meeting when a rate action could happen? Thank you.

CHAIR YELLEN. Well, I think Congress very wisely established the Federal Reserve is an independent agency in order to insulate monetary policy from short term political pressures. And I can say, emphatically, that partisan politics plays no role in our decisions about the appropriate stance of monetary policy. We are trying to decide what the best policy is to foster price stability and maximum employment and to manage the variety of risks that we see is affecting the outlook. We do not discuss politics at our meetings and we do not take politics into account in our decisions. As I said, we're generally pleased with the progress of the economy. And the decision not to raise rates today and to wait for some further evidence that we're continuing on this course is largely based on the judgment that we're not seeing evidence that the economy is overheating. And that we are seeing evidence that people are being drawn in, in larger numbers than at least I would have expected into the labor market and that that's healthy to continue. But that nevertheless, we do need to be forward looking. And if we continue along this course, it likely will be appropriate to raise the federal funds rate. And November, you asked about as well. Well, every meeting is live and we will again assess as we always do incoming evidence in November and decide whether or not a move is warranted.

When I speak to senior central bankers in various parts of the world — be it Eastern Europe, central Asia, or Africa — I always stress the importance of devoting time and effort to prepare Governors well for public appearances such as press conferences or speeches. A nation’s leading central banker ignores rehearsals ahead of his or her public speaking engagements at their own peril.

A hike in inflation targets seen as a cure for stubbornly low inflation

A group of economists, including former Central Bank of Ireland chief Patrick Honohan, has spoken in favor of raising central banks' inflation targets to meet their price stability mandates and boost their economies.

The latest Geneva Report on the World Economy:

Although policymakers have tools for stimulus at the lower bound, these may not always be enough. We therefore also consider adjusting policy frameworks to reduce the risk that nominal rates hit zero. Of the many proposals out there, the most obvious and simplest of such adjustments would be a modest increase in central banks’ inflation targets.

Perhaps the most common reason that policymakers have resisted raising the inflation target is the concern that credibility will suffer. We believe this concern is unwarranted and misplaced. Central banks should seek credibility for their commitment to meet their ultimate goals – full employment and price stability – not for their commitment to a particular number for the inflation target. A greater risk to central bank credibility may be the protracted inability to meet their mandates at the current low targets, due to the lower bound constraint.

The paper joins a raft of academic publications offering suggestions on how to prevent central banks from becoming increasingly impotent to deliver on their promise to engineer 2 percent inflation when interest rates have reached the zero lower bound.

True that the inability of central banks, in many developed countries around the world, to meet their declared 2 percent objectives poses a clear credibility threat.

Australia's central bank head turns into minimalist speaker

Governor Glenn Stevens chaired his final Reserve Bank of Australia policy meeting earlier this week and gave almost nothing away on the outlook for monetary policy as he handed over to successor Philip Lowe.

Bloomberg neatly summarized Stevens' last policy statement in this chart:

The statement accompanying his decision to keep the cash rate unchanged at a record low 1.5 percent was just 375 words long, the shortest since May 2015.

He’s “effectively leaving a reasonably clean slate” for Lowe, according to Royal Bank of Canada interest-rate strategist Su-Lin Ong.

A good role model for outgoing governors. Don't tie your successor's hands by committing the bank to a course of action you will no longer be part of...