Future of monetary policy communication: Open, clear, explanatory, and aimed at public

Alan S. Blinder, a Princeton University scholar and former Fed official, has made a couple of predictions on the future of monetary policy communication for the next few years. His academic account to a large extent fits my perceptions of the general trend in central banking communication, based on my practical experience with central banks modernizing their policy frameworks. Below I quote, and comment on, two of the Blinder’s six predictions.

Blinder’s prediction # 1: Transparency about monetary policy will increase over time.

Blinder: “I feel confident in predicting this as a generic statement, although the pace and details will vary from one central bank to the next. After all, some are extremely transparent already, while others are less so. But virtually all central banks have been moving in one direction in recent decades--toward greater openness--and I don’t believe that process is over. This prediction derives in part from pretty strong historical evidence that transparency is a one-way street: Once a central bank moves toward greater transparency in some dimension, it never reverts back to its old, less-transparent ways.”

My comment: There is indeed a global trend among central banks towards greater openness, and it is particularly visible in currently less transparent central banks of many low income and developing countries. As soon as a central bank modernizes and aims to become more forward-looking in policymaking, increasing policy and economic transparency becomes necessary. The only detail I would dispute is that there “never” is a way back once a central bank opens up. As illustrated by the recent case of the Czech National Bank, a temporary restriction on transparency, at the very least, remains a viable option at policymakers’ disposal should they decide so in the interest of their policy effectiveness.

Blinder’s prediction # 4: Central banks will keep trying to communicate with the general public, as they should. But for the most part, they will fail.

Blinder: “Much as we may believe that an independent central bank in a democracy should communicate with the citizenry, only a tiny fraction of the citizenry will tune in … You speak one way if you are addressing experts who understand the jargon and dote on every word, quite another if you are talking to members of the broad public who lack both expertise and interest and who are half-listening at best. I am a big believer in democratic accountability, which requires communicating with the broad public. But in truth, the part of central bank communication that matters most is the way policymakers communicate with markets—and for a simple reason: Market participants listen.”

My comment: Here Blinder has a point. As marketing guru Seth Godin has put it, nowadays “there's so much noise, so much clutter... that hoping that (people will) listen closely and carefully enough to figure out what you mean is a recipe for frustration.” And Godin offers a simple alternative: “Maybe, instead of insisting that people listen more closely, you could speak more clearly.” This is exactly what most advanced central banks, with those less advanced in their wake, have been painstakingly striving for: Use as plain and clear language as possible to explain themselves. As Blinder concludes: “It’s high time that central banks, which have travelled a long way down the communications road already, cease viewing words as scarce commodities to be given only grudgingly. Montagu Norman was wrong; they should explain.” Indeed, gone are the days of Montagu Norman, the Governor of the Bank of England from 1920 to 1944, who is often cited as saying that the role of a central banker was: “Never explain, never apologize”.

Blinder made the predictions in a paper titled “Through a Crystal Ball Darkly: The Future of Monetary Policy Communication”, prepared for the Annual Meetings of the American Economic Association, Philadelphia, January 6, 2017.