XXIII Annual Conference of the Central Bank of Chile
Opening remarks by Mario Marcel, Governor of the Central Bank of Chile
"Public Trust and Central Banking"
July 15, 2019 - The Ritz Carlton Hotel, Santiago, Chile
Dear colleagues and friends, distinguished guests: welcome to the XXIII Annual Conference of the
Central Bank of Chile.
Since 1997, the Central Bank of Chile has been convening prominent scholars and policymakers to
this Conference to discuss major issues in central banking and their implications for emerging
economies. This version is no exception; fresh and thoughtful research will support discussion over
the next two days. We thank and welcome all participants, including representatives from 21 central
banks around the World.
The Annual Conference this year has some features that make it special. First, it will be held
backto-back with the IMF-CBC-IMFER Summer Conference on "Current Policy Challenges Facing
Emerging Markets", so we expect many of you to stay in Santiago longer than usual, for a full week
of rich discussions. Second, this year we commemorate 30 years of independence of the Central
Bank of Chile, so we have devoted our Annual Conference to revisit the achievements and
challenges of central bank independence around the globe.
Central bank independence: achievements, challenges and threats
Central Bank independence is one of the most remarkable pieces of institutional architecture
fostered by economic thinking in the last half century. Theoretical studies in the 1980s stressed
central bank independence as a precondition to bringing inflation under lasting control, and support
for reform soon spread from academia to policymaking. Professor Kenneth Rogoff, was a major
contributor to this process, so we are privileged to have him as keynote speaker at this Conference.
Central bank independence delivered upon expectations. As the countries with independent central
banks grew to nearly 70 in recent years, average world inflation dropped to 4%, from more than
25% 30 years ago. Empirical studies are pretty conclusive on a strong correlation between central
bank independence and low and stable inflation after controlling for other variables.
The Central Bank of Chile, as one of the pioneers of this remarkable process in the emerging world,
provides a good example of the merits of institutional independence. Independence of the CBC
ended 40 years of double-digit inflation and coincided with the return to democratic rule in 1990.
Inflation fell from almost 30% to 3% through the 1990s while the economy expanded at an annual
average 6% in the decade, doubling the average for the previous 40 years. This provided legitimacy,
credibility and respect for the Central Bank under its independent status, encouraging it to maintain
high technical standards and commitment to its statutory goals of controlled inflation and financial
stability over the years.
Independence also helped many central banks to deal with the Global Financial Crisis (GFC) of 2008
and its aftermath. The magnitude of the crisis demanded prompt and decisive action, while its global
dimension required coordination across national borders. Independence from national
governments and the authority to act swiftly were critical in containing the deepening of the crisis
and its spillovers throughout the economy. Some of the largest independent central banks applied
their powers to articulate unprecedented measures, like massive asset purchases, whose effects
last until today.
Independent central banking has not been an easy ride, though. One thing is to be free from external
interference, quite another is to build the policy frameworks, governance structures and standards
to guide actions in a consistent and predictable way. Independent central banks have endorsed and
benefitted the most from inflation targeting, have led the improvement in communications into
forward guidance, have built reporting mechanisms, and have developed transparency and integrity
standards beyond statutory requirements.
While policy frameworks, monitoring mechanisms and policy tools could rely on sound theoretical
work and accumulated experience for monetary policy over the years, issues are not so well resolved
with financial stability. This is not easy to measure, financial instability may come from many
sources, and there is still and open debate on who -central banks or government regulators-- should
command macro prudential policies. This is related to the potential tradeoffs between monetary
policy and financial stability that were intensely debated in this venue two years ago.
The former is a good illustration of the difficulty for independent bodies to deal with multiple policy
mandates and/or the distributional effects of policy decisions, which involve choices that are
normally expected in the political process but not easy to tackle by nonelected officials. This was
particularly exposed during the GFC, given the perception of unfairness in the distribution of the
burden of the crisis and the actions to contain it.
Even success of independent central banking has come at a price. Controlling inflation has made the
latter less of a concern to citizens and politicians. The effectiveness of central banks in securing
macro and financial stability in the post-crisis years may have also removed responsibility from other
actors and may have encouraged markets to rely too much on central banks as risk managers.
The current wave of political populism is a further source of risks. Threats to central bank
independence usually do not come from the public but from political leaders that resent distributed
governance as well as checks and balances. In the last few months, we have witnessed a number of
attacks on central bankers for coming in the way of ambitious populist agendas.
Independence and credibility
This is a good reminder that independence of central banks cannot be taken for granted. No matter
how deeply it is ingrained in the law, independence can always be taken away or significantly
undermined, de facto or de jure. In the real world, central bank independence relies on the
willingness of key stakeholders-most notably governments and legislatures-to play by the rules
and by the ability of central banks to gain legitimacy and credibility from stakeholders.
Independence does not automatically guarantee credibility either. Being free from political
interference from politicians does not make a central bank infallible nor free from undue influence
from other actors. Credibility needs to be protected and cultivated amid social, political and
technological change.
In a recent piece, the IMF illustrates the importance of central bank credibility (IMF, 2018). It shows
that central banks can better accommodate shocks with smaller output loss and social cost the more
anchored are inflation expectations to the policy target, with lower pass-through from the exchange
rate to consumer prices and lower persistence of inflation.
More generally, public policies should be more effective the more credible the institutions in charge
of them, as it helps aligning the behavior of the public to the policy objectives pursued. This is surely
more important for independent institutions that cannot rely of a broader set of incentives and
controls to shape the behavior of their stakeholders. A key question then is how to build credibility.
This is an issue only partly addressed by Economics. The rational expectations school would suggest
adopting a clear-cut policy rule, communicating it openly and clearly, and ensuring strict compliance,
to exploit the learning capacities from economic agents. This certainly underlies the growing
popularity of inflation targeting and the forward guidance that comes with it. But even this may be
challenging in a changing environment, where the business cycle overlaps with structural changes,
and more so in areas, like financial stability, where policy targets may be hard to design and explain.
From credibility to trust
So, a broader approach to credibility-building may be needed. To this end, it may be useful to
acknowledge that credibility is an attribute of a certain individual or institution: that of being
believed or trusted. So surely, credibility does not depend exclusively on your own actions but on
how far others trust you.
Trust, in turn, is defined as a person's belief or expectation that another person or institution will
act in favor of one's well-being (OECD, 2017). So we could think of credibility as an institutional asset
that depends on the factors that influence trust from stakeholders and the public.
Credibility in a central bank refers to public's belief that future actions of monetary policy that are
optimal today will be carried out even if they no longer seem optimal in the future. This is related
to public trust, but the two concepts are not quite the same. One can imagine the public having trust
in the central bank and at the same time the latter adopting a discretionary monetary policy strategy
to retain full flexibility regardless of past promises. However, it is hard to imagine the opposite
situation of a central bank fully engaged in the management of expectations without trust from the
public.1
This also applies to communication. We can discuss alternative strategies to make sure that the
message issued by a central bank is adequately understood and internalized. However, there is little
that a good communication strategy can do if the public does not trust the central bank.2
1
Christelis et al. (2016) have formally explored this for the Europe using micro data, finding that higher trust
in the ECB lowers inflation expectations on average, and significantly reduces uncertainty about future
inflation, even after controlling for people's knowledge about the objectives of the ECB. Similarly, Mellina and
Schmidt (2018) find that having greater trust increases the probability of expecting unchanged prices and
decreases the likelihood of expecting either slightly or sharply rising prices over the medium term.
2
Through behavioral insights, Bholat et al. (2018) show that public's trust in the Bank of England can be further
improved by enhancing the communication with the public, particularly at times when trust in public
institutions has fallen and responsibilities delegated to central banks have increased.
Approaching institutional credibility from stakeholders' trust has a number of conceptual and
operational advantages.
First, there is a large body of research assessing its value: trust is at the heart of societies and a
major component of social capital. A number of studies have related interpersonal and institutional
trust to lower transaction costs, social cohesion and wellbeing.
Second, trust is a livelier concept, which can respond to information and experience acquired by
stakeholders, as compared to the more static notion of credibility. Trust is not an abstract concept,
but an attitude developed by actual people based on their beliefs, information and actual
experiences.
Third, by focusing on stakeholders, trust can help institutions to pay closer attention to their
environment, changes in social values and standards, thus reinforcing their end beneficiaries rather
than structures or procedures. This may be especially important for technocratic and independent
organizations, like central banks, that may tend to isolate themselves despite mandates in the
general interest.
Finally, as we will see below, recent work shows that trust can be deconstructed into a series of
components that can be linked to institutional actions. This may provide a stronger lead to how trust
can be protected, built, or eroded.
In what remains, I will argue that public trust is the cornerstone for safeguarding central bank
independence as a stable outcome of the way modern societies decide to allocate powers across
institutions.3 A central bank that is not trusted is vulnerable to political pressure to deviate from its
mandate, regardless of whether it is formally independent or not.
It is therefore crucial for modern central banks to understand better the concept of trust, the
mechanisms for fostering and maintaining it, and to think about strategies and tools for the
management of public trust.
What is public trust? What can be done about it?
Available data indicates that public trust in government differs substantially across countries, but it
tended to deteriorate after the GFC. Within countries, trust may also vary significantly across
specific public institutions, being stronger for social services than for political bodies. Cross-section
evidence shows a strong, positive relationship between public trust and per capita income,
suggesting an association between trust and development, albeit causality is unclear.4
3
The broader concept of trust in government institutions is not delinked from the more specific one on central
banks. For the case of New Zealand, Hayo and Neumeier (2017) find a statistical connection between overall
trust in government institutions and public trust in the Reserve Bank of New Zealand.
4
There is also evidence on the statistically positive relationship between trust and central bank independence,
though the link is not linear (Berggren et al., 2014).
To dig deeper into the drivers of public trust and its impact on institutional effectiveness we can
draw on recent work developed by the OECD on the subject (OECD, 2017). This work proposes a
taxonomy distinguishing five dimensions of trust: reliability, adaptability, integrity, openness and
fairness.
Reliability refers to the extent to which an institution can deliver on the expectations set upon it in
an effective and predictable way, reducing uncertainty from the public. Reliability of an institution
depends and can be assessed on the basis of the clarity of its mandates and specific goals; the quality
of its organization, planning and decision-making process, and its operational efficiency, including
its capacity to command the appropriate financial, technical and professional resources.
Adaptability refers to the capacity to recognize changes in the environment, either economic, social,
technological or institutional, and to adapt to them without compromising its commitments to the
public. Long-term planning, research, market intelligence and risk management are important
mechanisms in this regard. To be adaptable while remaining reliable, an institution should be able
not only to identify changes, new trends and risks, but also to explain them to the public, including
the adjustments that may be required from them.
Integrity means putting the general interest entrusted to the institution above the particular
interests of its authorities, employees or other narrow groups. This means far more than strict
regulations and effective control; it may require benchmarks, ethics, checks and balances and
openness to scrutiny that can respond to changes in social standards of accepted behavior, which
may move faster than legislation.
The latter entails with accessibility, which refers to the ability of an institution to understand
people's needs, leverage a wide pool of information and achieve higher levels of compliance. To be
accessible, an institution should develop active and passive transparency mechanisms, seek
feedback from the public and to foster dialogue and consultation with stakeholders.
Lastly, fairness acknowledges differences across society and that institutional actions may be far
from neutral. As a component of trust, fairness involves being aware of such differences and to find
ways to prevent, mitigate or compensate redistributive effects that are particularly undesired.
Within an institution, fairness also involves the creation of a working environment that fosters
productive exchange of ideas, free of harassment and discrimination.
Fostering trust in a Central Bank
The OECD taxonomy may be useful in providing a conceptual basis to go beyond generalizations on
public trust and to take a more proactive approach to nurture it. In particular, it provides a good
framework to develop ways to assess trust and to identify concrete levers that an institution can
use to foster trust. However, can this framework be applied to a central bank?
In my view, this is not only possible, but necessary as well. Assessing trust on a central bank by
inserting a question in an opinion survey suffers from the same limitations as with government
institutions and a few more. Answers to a broad question may be more reflective of prejudice than
of attitudes that may shape the response to future policy decisions or incoming information and
may come too late in a process of social or market change to make any difference. In addition,
experience with opinion surveys in different countries has shown that no more than half of
respondents have some basic knowledge of central banks.
Adopting a more systematic and rigorous approach to assessing trust in the central bank may not
only help address these shortcomings but also to acknowledge the full diversity of its
responsibilities. I have already noted research stressing the relevance of credibility for the
effectiveness of monetary policy, but credibility and public trust may be equally important for
financial stability, the issuing of currency, or the generation of statistics.
Moreover, one can conceive that trust across these functions could be somewhat connected. Loss
of trust from a misconceived financial intervention or from distorted statistics may spillover to the
way stakeholders assess the credibility of monetary policy. To foster trust, a central bank must go
beyond the conduct of monetary policy to focus on how to develop reliability, adaptability, integrity,
openness and fairness in its different areas of work.
In the context of central banking, reliability is not equivalent to a dovish monetary policy giving
priority to shortsighted demands to stimulate the economy, but to do the proper balancing of risks
to align monetary policy with long-run social welfare. It means acting in a coherent way, showing
thorough decision-making, carefully explaining reasons and arguments behind every action,
conducing predictable decisions, and running efficiently the central bank as an organization. For
this, I consider essential a clear framework for monetary and financial policy, data-driven decision
making, unquestionable technical capacity and statistics, and skillful crisis management.
Reliability of a central bank, in turn, can be assessed based on the accuracy of its projections, its
ability to identify financial risks, the quality of its statistics and the safety of the domestic currency
and payment systems.
For adaptability, a central bank must develop its analytical skills to identify structural changes in the
economy and emerging sources of risk, telling them apart from necessary innovation. To this end, it
may need to deepen its knowledge of markets and agents, and to be on top of technological
developments. Adaptability also depends on the preparedness to react to unforeseen events.
Central bank integrity requires appropriate access to information, control of conflicts of interest,
strong middle office arrangements in market operations, and effective auditing across different
areas and processes. For accessibility, communication of monetary policy is essential, as well as
analysis and communication of financial risk, consultation in the issuing of new regulations, and
well-structured accountability. The fairness dimension of trust can be enhanced through prevention
of crises and risk management, financial education and inclusion, and securing equal opportunities
in staffing and promotion decisions.
Assessing public trust in a central bank across these dimensions does not need to start from scratch.
Instead, it provides a framework to organize existing data in a more meaningful way. It can also shed
a new light on how to read and use data coming from different streams of the literature. The
substantial work on central bank transparency led by some of our participants in this conference is
a good case in point.
In sum, after recognizing credibility as the main asset of a central bank, especially an independent
one, we can conclude that drawing on parallel work on trust in institutions may provide a useful
framework to assess the current situation and to guide action to address existing gaps and
vulnerabilities.
Trust in the Central Bank of Chile
The experience of the Central Bank of Chile can illustrate some of the ideas above.
The IMF study on the importance of credibility for monetary policy underscored anchoring of
inflation expectations in Chile as key to the effectiveness of its monetary policy and macro resilience
in the face of external shocks. Deviations of long-term forecasts of headline inflation from target
have been less than 0.1%-being the lowest for a sample of emerging countries, and even lower a
benchmark group of advanced economies. This is remarkable considering that inflation volatility in
Chile has not been particularly low relative to other emerging economies.
Yet we do not see credibility as an immutable attribute, given the dynamism of trust in institutions
in the public opinion and market perceptions. We believe that a positive past record helps, but trust
can deteriorate in a number of ways, some of them pretty fast, in the face of new standards and
developments. Therefore, trust needs to be protected and enhanced in a systematic way with
different stakeholders in the different dimensions of activity of the Bank.
This is well reflected in the 2018-2022 corporate strategy under course. This was based on an
unprecedented consultation of stakeholders and participatory internal process. It defined as a vision
for the Bank to be a trustworthy technical institution, known for its high standards in achieving its
institutional objectives. On this basis, we have launched a number of initiatives aimed at fostering
public trust in terms by improving its reliability, adaptability, integrity, accessibility and fairness.
To improve its reliability, the Central Bank of Chile has taken a thoughtful process of revision of its
framework of monetary policy and forward guidance. Great emphasis has also been given to
strengthening the technical toolkit to identify and communicate sources of financial risk.
With a focus on adaptability, we have introduced special chapters, analytical boxes and companion
studies to our flagship reports. We have also launched a technological observatory with the goal of
identifying new sources of risk, and the creation of the Corporate Risk Area within the Bank.
For integrity, we have broadened the framework and coverage of declaration of interests among
executives and staff in sensitive functions, and have strengthened our external auditing committee.
Some initiatives to improve the Bank's accessibility include regular presentations of Bank reports
throughout the country, the development of market intelligence mechanisms and the upgrading of
communications by creating an Institutional Affairs Division. To foster fairness we are also
deepening our analysis of the economic and financial behavior of households and raising our
contribution to financial literacy and education to the highest world standards.
Last, but not least, the CBC launched an external evaluation of its performance in the two central
areas of monetary policy and financial stability by convening a panel of reputed academics and
central bankers, some of whom are here today. We have committed to present the report to the
Chilean Senate next September and to take the panel ́s recommendations as a guidance to further
strengthening reliability, adaptability and transparency of our work in the years to come.
Closing remarks and acknowledgements
In sum, I underscore the importance of public trust as foundation of modern monetary policy and
for the legitimacy of independent central banks in performing their broader mandates. This is
ingrained in the agenda of our Annual Conference this year: new challenges to central bank
independence, the management of central bank credibility, and the designing of the best
communication strategies for an effective monetary policy.
I would like to thank Ricardo Reis for being the external organizer of this Conference, as well as to
Ernesto Pastén and Diego Saravia for being our local counterparts. I also thank all presenters and
contributors to our program and the conference volume that will be published thereafter. I also
thank to our friends and colleagues from the International Monetary Fund for being here and for
organizing the conference further down the week.
Let me finish by thanking Alejandra Rozas, Camila Figueroa, Paloma Navarro, María José Reyes,
Felipe Leal and both the Public Affairs Department and the Research Department for all their
invaluable help managing the challenging logistics of organizing these two conferences together.
Thank you, have a pleasant stay in Santiago and a fruitful discussion over the next two days.
***
References
Berggren, N., S.-O. Daunfeldt, J. Hellström (2014), "Social Trust and Central-Bank Independence,"
European Journal of Political Economy 34: 425-439.
Bholat, D., N. Broughton, A. Parker, J. Ter Meer, and E. Walczak (2018), "Enhancing Central Bank
Communications with Behavioural Insights," Staff Working Paper 750, Bank of England.
Hayo, B. and F. Neumeier (2017), "Explaining Central Bank Trust in an Inflation Targeting Country:
The Case of the Reserve Bank of New Zealand," Working Paper 236, ifo Institute.
Christelis, D., D. Georgarakos, T. Japelli, and M. van Rooij (2016), "Trust in the Central Bank and
Inflation Expectations," Working Paper 537, De Nederlansdsche Bank.
International Monetary Fund (2018), World Economic Outlook, Chapter 3, Challenges for Monetary
Policy in Emerging Markets as Global Financial Conditions Normalize, October 2018.
Mellina, S. and T. Schmidt (2018), "The Role of Central Bank Knowledge and Trust for the Public's
Inflation Expectations," Discussion Paper 32/2018, Deutsche Bundesbank.
Organisation for Economic Co-operation and Development (2017), Trust and Public Policy. How
Better Governance Can Help Rebuild Public Trust, OECD Public Governance Reviews, OECD: Paris.