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.