luis de guindos : communication, expectations and monetary policy intervention by mr luis de guindos, vice - president of the european central bank, at the ecb policy panel of the annual congress of the european economic association, manchester, 27 august 2019. * * * introduction ladies and gentlemen, every year, the ecb organises a policy panel at the annual congress of the european economic association. 1 the intention of these panels is to combine the results of research and the views of policy makers to advance our thinking on a topic of great policy relevance. this year, it has been straightforward to decide on such a topic. communication and expectations are central to the conduct of monetary policy, and there is a substantial body of research that allows us to have an informed discussion on the topic. it is therefore a great pleasure for me to speak at this year ’ s policy panel. central banks communicate with many different groups of economic actors. let me focus my remarks on two such groups, both of which are essential to the conduct of monetary policy, namely participants in financial markets on the one hand, and the general public on the other hand. the central role of financial market expectations in the conduct of monetary policy there is a tight two - way relationship between central banks and financial markets. extensive research has dealt with the flow of information from central banks to financial markets, and has shown that central bank communication exerts strong effects on financial markets. 2 for instance, as central banks have become transparent about their objectives and their reaction functions, the inflation expectations that are priced into financial assets have become better anchored. they have become less volatile and broadly aligned with the central banks ’ inflation aims. beyond this, markets also react strongly to the communication of the central bank ’ s assessment of the current conjunctural situation and the economic outlook. 3 at the same time, the influence also goes in the other direction : financial markets send signals to the central bank, which constitute a central input to decision - making. it is important for us to get the market view about where the economy stands, and where it is heading. this helps us crosschecking our own views, and it provides us with a benchmark against which we can communicate our own assessment. for instance, our projections are based on market expectations about the future path of short - term interest rates, oil and non - oil commodity prices and stock market prices – effectively, we are therefore telling the markets where, in our view, the economy is heading

if their expectations were to materialise. to put it in other words, central bank communication has to be two - way. the central bank talks and listens to financial markets at the same time. there are two points in this relationship which i want to highlight. first, by influencing asset prices and expectations of financial market participants, the central bank affects the very signals which it wants to use as input to its policy making. this has 1 / 4 bis central bankers'speeches become known as the “ echo chamber effect ”. as hyun shin from the bis has put it, “ the louder the central bank talks, the more likely it is to hear its own echo. ” 4 this is particularly prominent in times when the central bank gives strong forward guidance. ecb research has shown that in such circumstances, market expectations become “ cemented ”, i. e. they do no longer respond to news about the macro economy. 5 this is something we need to keep in mind when designing our communication strategy and when reading the signals from financial markets – the more forward guidance we give, the less informative are market signals for gauging the state and the expected evolution of the economy. a second point is that even if central bank transparency and communication has helped anchoring market - based inflation expectations, they do remain rather volatile. the volatility itself is a signal that is useful for us to understand. however, even if markets are volatile, central bank policy cannot be volatile. hence, we need to look through some of this volatility to get a feeling for the underlying pricing that would result in the absence of short - term market moves that are likely to revert quickly. the echo chamber effect and the inherent noisiness of market signals are reasons why we need to take the expectations that are priced in financial markets with a pinch of salt. this means that we need to also rely on other sources of information to ensure that we conduct a robust monetary policy. the incoming macroeconomic data are one such source. as we keep stressing, our monetary policy is data dependent, not market dependent : indications from market expectations cannot replace our policy judgement. another way of robustifying our analysis is to look for expectations beyond those expressed in financial market prices. 6 the importance of communication with the general public this brings me to the second group of actors i want to mention, the general public. central bank communication with the general public has only more recently gained the attention of academic research. also here, we