Edward Robinson: Central bank communications - evolution in theory and practice
Central bank: mas | Type: speech | Date: 2019-12-04

## Edward

Robinson:

Central

bank

communications

-

evolution

in theory and practiceOpening remarks by

Mr

Edward

Robinson,

Deputy

Managing

Director (Economic

Policy)

and Chief

Economist

of

the

Monetary

Authority

of

Singapore,

at

the

IMF

High-Level

Peer-to-Peer Forum on 'Central Bank Communications in ASEAN-5 Countries: From Principles to Practice', Singapore, 4 December 2019.*

*

*

## 1.

INTRODUCTIONMay I extend warmest greetings and welcome to all visitors and overseas participants.

MAS is very pleased that the IMF is organising this conference on a most pertinent topic in Singapore.

## 2.

MONETA RY POLICY COMMUNICATIONS-FROM OPACITY TO TRANSPARENCYSince the 1990s, there has been a clear trend in central banking circles towards greater transparency.

This marked a significant turnaround from previous decades that prized monetary policy-making as 'an arcane and esoteric art best practiced out of public view'.

Former BOE Governor Montagu Norman (1920-1944) reputedly had a personal motto of 'Never explain, never excuse.' 1The change has much to do with the growing recognition that monetary policy is essentially about managing expectations.

The increasing adoption of inflation targeting also spurred advances on the transparency front, with its communication-heavy requirements of policy targets, forecasts and outlook.The shift towards greater transparency is generally held as desirable for two broad reasons.

First, transparency can enhance the effectiveness of monetary policy. 2- By helping to anchor long-term inflation expectations, transparency improves policy efficacy and facilitates the overall pro-equilibrating tendencies of the economy.- Central bank communication increases the predictability of central bank actions.

So, it

raises

the

'signal-to-noise'

ratio,

which

reduces

uncertainty

faced

by

private agents and strengthens the pass-through from communication to market expectations.Second , transparency is a mechanism for democratic accountability, in a world of policy discretion and central bank independence.- Transparency makes it easier to judge whether a central bank is committed to its announced policy, and acts as a check on possible temptations to base policy on short-run or political considerations.In short, communication demystifies and democratises monetary policy.The empirical literature finds that better information about central bank actions can lead markets to do the central bank's work for it.- Blinder

et

al.

(2001)

was

an

early

study

which

found

that

the

US

bond

market's ability

to

forecast

Fed

actions

improved

from

around

1996

onwards,

a

few

years after

the

Fed

started

announcing

policy

changes

and

publishing

minutes

of

its meetings.

Relatively

small

changes

in

the

Fed's

policy

rate

were

amplified

by complementary

movements

in

the

bond

market,

which

helps

to

stabilise

theBIS central bankers' speechesmacroeconomy.- The rich literature that followed affirms the benefits of central bank announcements in guiding market outcomes, with a number of papers showing that market interest rates have tracked policy rates more closely since the 1990's. 3- Separately,

communication

was

also

shown

to

reduce

the

size

of

central

bank interventions required to achieve desired policy rates. 4Further, effective communication from central banks on the future path of monetary policy, or forward guidance, can potentially be a powerful tool in a global environment of low nominal rates and reduced policy space.- The seminal paper by Eggertsson and Woodford (2003) demonstrated that changes in the expected future conduct of monetary policy can have a substantial effect on the

macroeconomy,

even

when

the

economy

is

at

the

zero

lower

bound

and conventional monetary policy has lost potency.- Subsequent

empirical research also show

that forward guidance can help macroeconomic stabilisation efforts. 5Nevertheless, despite the clear trends and benefits of greater information dissemination, central bank transparency has evolved cautiously including in the region, reflecting in part the irreversibility of communication initiatives.

From the perspective of preserving policy integrity and effectiveness in a second best world, more is not necessarily always better.

At each step along the way, central banks therefore need to take account of the potential costs against the perceived benefits of greater transparency.Several considerations could be pertinent.

First, too much information may crowd out the formation of private sector beliefs.- Giving

more

information

may

induce

not

more,

but

less,

clarity

among

market participants,

as

there

are

limits

to

how

much

information

can

be

digested effectively. 6- The public may not easily understand the uncertainty and conditionality surrounding central bank forecasts. 7- Or worse still, agents might come to realise how uncertain the central bank is about economic conditions. 8- Sometimes, it is just not feasible to provide that degree of clarity out in the public.Second , central bankers need to think about the potential interaction of greater transparency with the path of future monetary policy decisions.- Policy

expectations

engendered

by

communication

may

unduly

constrain

policy action.Indeed, empirical evidence suggests that there can be too much of a good thing, although anchoring the optimal degree of central bank transparency still proves elusive.- A number of studies have found diminishing returns to central bank transparency on market expectations. 9- Others also found that disseminating specific and detailed information, such as full meeting transcripts, provides little marginal value over more concise communication,

such

as

policy

meeting

minutes,

in

terms

of

guiding

market expectations. 10There are a set of papers showing that more information can result in destabilising market expectations.- First ,

given

that

monetary

policy

relies

on,

and

influences

market

signals,

the circularity

between

monetary

policy

and

market

reactions

may

amplify

a

bad signal.

Increased

transparency

in

the

central

bank's

policy

rule

may

fuel

this circularity, and destabilise the macroeconomy. 11 12- Second ,

too

much

information

from

the

central

bank

may

result

in

conflicting signals about the policy path, a situation Blinder (2007) refers to as a 'cacophony of voices'

that

may

increase

uncertainty

for

private

agents.

Market

participants

are also

more

likely

to

react

to

exogenous

disturbances

in

such

a

scenario,

further heightening uncertainty. 13- Third , more transparency may not help to align market expectations if the additional information

lacks

credibility.

Central

bank

forecasts

of

longer-term

interest

rates have

been

found

to

have

little

effect

on

market

expectations,

suggesting

that uncertainty about future developments

reduces

the

credibility of longer-term forecasts. 14

## 3.

CURRENT MONETARY POLICY COMMUNICATION CHALLENGESLet me sum up with some comments on monetary policy communications in the current conjuncture.Central banks, in deciding on the appropriate approach and calibration to transparency, must take into account the greater complexity of the operating environment confronting monetary policy.These are well known and I will just highlight three:- Policy

rates

near

the

zero

lower

bound

and

the

turn

to

various

unconventional monetary policy tools.- The reality of multiple objectives and instruments, straddling the price and financial stability mandate of the central bank.- The challenges to monetary policy independence amongst open economies, in the context

of

global

financial

cycles

and

spillovers

arising

from

overtaxing

monetary policy.A recent Economist article even asked, 'Can central banks talk too much?' 15- It essentially argued that forward guidance on interest rates could complicate price dynamics

in

the

bond

market

as

the

central

bank

simultaneously

signals

its intentions to the markets, while taking its cue from them.- As

policy

decisions

are

ultimately

a

judgement

call

made

against

an

inherently uncertain backdrop, there is naturally a limit to how much transparency can do to make central bank action predictable.Communication is also context-specific, where a standard rules-based approach will not work.

Discussions at forums like this are extremely valuable because they provide the opportunity to share experiences from real-life settings, including what has worked and what has not, as well as the pitfalls and the nuances.

Hopefully, some general guiding principles can emerge, that will prove useful for practitioners gathered here today.In conclusion, the guidelines for monetary policy communications are probably due for a refresh given the increased complexity facing the formulation and implementation of monetary policy.

ForBIS central bankers' speechessure, central banks must continue to talk, engage, and be accessible and accountable.

How we do it could evolve, and this high-level seminar serves to help us do just that and hone our communication skills.I wish you a most productive session.

Thank you.

## ReferencesBernanke, B S (2007), 'Federal Reserve Communications', Speech at the Cato Institute 25th Annual Monetary Conference, Washington, D.C., 14 November.Blinder, A S, Goodhart, C, Hildebrand, P, Lipton, D, and Wyplosz, C (2001), How Do Central Banks Talk?

Geneva Reports on the World Economy 3, International Center for Monetary and Banking Studies and Centre for Economic Policy Research.Blinder, A S (2007), 'Monetary Policy by Committee: Why and How?' European Journal of Political Economy, Vol. 23(1), pp. 106-23.Blinder, A S, Ehrmann, M, Fratzscher, M, De Haan, J D, Jansen, D J (2008), 'Central Bank Communication and Monetary Policy: A Survey of Theory and Evidence', Journal of Economic Literature, Vol. 46(4), pp. 910-945.Chehal, P and Trehan, B (2009), 'Talking about Tomorrow's Monetary Policy Today', FRBSF Economic Letter, 35.Cruijsen, Carin A B v d, Eijffinger, S C W & Hoogduin, L H (2010), 'Optimal Central Bank Transparency", Journal of International Money and Finance, Vol. 29(8), pp. 1482-1507.Demiralp, S, and Jordá, O (2002), 'The Announcement Effect: Evidence from Open Market Desk Data', Economic Policy Review, Federal Reserve Bank of New York, Vol. 8(1), pp. 29-48.Dincer, N N and Eichengreen, B (2014), 'Central Bank Transparency and Independence: Updates and New Measures', International Journal of Central Banking, Vol. 10(1), pp. 189-259.Eggertsson, G and Woodford, M (2003), 'The Zero Bound on Interest Rates and Optimal Monetary Policy', Brookings Papers on Economic Activity, Vol. 2003(1), pp. 139-233.Gaballo, G (2018), 'Price Dispersion, Private Uncertainty, and Endogenous Nominal Rigidities', Review of Economic Studies, Vol. 85(2), pp. 1070-1110.Goodhart, C and Lim, W B (2011), 'Interest Rate Forecasts: A Pathology', International Journal of Central Banking, Vol. 7(2), pp. 135-171.Hayo, B and Neuenkirch M (2018), 'Central Banks' Predictability: An Assessment by Financial Market Participants', International Journal of Central Banking, Vol. 14(4), pp 163-185.Hubert, P and Labondance, F (2018), 'The Effect of ECB Forward Guidance on the Term Structure of Interest Rates', International Journal of Central Banking, Vol. 14(5), pp 193-222.Kahnemann, D (2003), 'Maps of Bounded Rationality: Psychology for Behavioral Economics', Amercian Economic Review, Vol. 93(5), pp. 1449-1475.Kohn, D L, and Sack, B (2003), 'Central Bank Talk: Does It Matter and Why?', Finance and Economics Discussion Series, Working Paper No. 2003-55.Lange, J, Sack B, and Whitesell, W (2003), 'Anticipations of Monetary Policy in Financial Markets', Journal of Money, Credit, and Banking, Vol. 35(6), pp. 889-909.Mishkin, F (2004), 'Can Central Bank Transparency Go Too Far', NBER Working Paper No. 10829.Moessner, R (2013), 'Effects of Explicit FOMC Policy Rate Guidance on Interest Rate Expectations', Economics Letters, Vol. 121(2), pp. 170-173.Morris, S and Shin, H S (2018), 'Central Bank Forward Guidance and the Signal Value of Market Prices', AEA Papers and Proceedings, Vol. 108, pp. 572-577.Samuelson, P (1994), Panel remarks, Federal Reserve Bank of Boston Conference, Conference Series 38, Jeffrey C Fuhrer (ed) 'Goals, Guidelines and Constraints Facing Monetary Policymakers'.- Bernanke (2007) 1- Blinder et al. (2008) 2- Lange et al. (2003) showed that T-Bill yields track movements in the fed funds rate more successfully since the 1990's, while Kohn and Sack (2003) found that statements released by the FOM C significantly affect market interest rates. 3- Demiralp and Jorda (2002) found that a smaller quantity of open-market operations have been required for the Fed to achieve its desired policy rate since 1994. 4- Hubert and Labondance (2018) found that the ECB's forward guidance announcements persistently reduced rates across the yield curve, with the strongest effects at the longest maturities.

M oesser (2013) found greatest effects for the US at the three-year horizon.

However, Chehal and Trehan (2009) found little evidence that the Bank of Canada's forward guidance in April 2009 significantly affected market expectations of interest rates. 5- Kahnemann (2003) 6- Mishkin (2004) 7- Cruijsen et al (2010) 8- See

Dincer

and

Eichengreen

(2014).

Cruijsen

et

al

(2010)

also

found

diminishing

returns

in

reducing dispersion of inflation expectations, with expectations dispersion declining initially as transparency rises but rising beyond a certain level of transparency. 9- Hayo and Neuenkirch (2018) 10- Samuelson (1994) famously likened this problem to a monkey looking at a mirror.

The monkey reacts to its mirror image, unaware that it is looking at its own reflection. 11- Morris and Shin (2018) 12- Gaballo (2018) 13- Goodhart and Lim (2011) 14- Free exchange: A little less conversation, 'Can central bankers talk too much?', The Economist, 26 Oct 2019. 15