my choosing this topic is quite straight forward. this lecture is sponsored by a media house, and what better platform than this to share with the public some of the dilemmas and challenges we face in our communication strategy. domain of communication 6. central bank communication has been the subject matter of much intellectual discourse, but this has almost always been in the context of communication of monetary policy. that is understandable because monetary policy is at the heart of central banking and also possibly because communication of monetary policy is arguably more challenging than communicating other policies. in my lecture today though, i will speak about communication in a broader context – not just with reference to monetary policy but also encompassing other dimensions of the reserve bank ’ s mandate such as, for example, regulation and supervision, currency management and external sector management. bis central bankers ’ speeches alan greenspan – the doyen of communication! 7. it would be blasphemous to speak about central bank communication without first paying homage to that doyen of central bankers – alan greenspan. so let me get on with it. 8. greenspan is notoriously famous for several things including for transforming central bank communication to an art form. “ since i ’ ve become a central banker ”, he said in 1987, “ i ’ ve learned to mumble with great incoherence. if i seem unduly clear to you, you must have misunderstood what i said. ” 9. after nearly 15 years on the job, in october 2001, greenspan took a u turn saying that, “ openness is more than just useful in shaping better economic performance. openness is an obligation of a central bank in a free and democratic society. transparency of our activities is the means by which we make ourselves accountable to our fellow citizens to aid them in judging whether we are worthy of that task ”. indeed, we owe it to greenspan, and perhaps his delphic utterances, for generating much learned commentary on why central bank communication is important. why is central bank communication important? 10. over the last two decades, central banks have moved towards clearer communication and greater transparency. this has been driven by several motivations. 11. first and foremost, central banks have realized that open and transparent communication enhances policy effectiveness by way of achieving expected outcomes. this shift in central bank theology from deliberate obscurity to greater transparency actually reflects a shift in the theory of monetary policy. up until the early 1990s, monetary policy was strongly influenced by nobel laureate robert

to the factors which could lead to long - term differences in inflation. i should like first to address briefly the issue of price level convergence. price level convergence could be expected to take place in the euro area for at least two reasons. first, the completion of the internal market and increased cross - border price transparency contribute to eroding the scope for the existence of substantial price differentials for products which are easily tradable across borders. to a large extent, this may have taken place already before the start of economic and monetary union ( emu ), but differences remain. one example of such a price convergence that has attracted public attention relates to car prices. secondly, with regard to goods and services which are less easily tradable across national borders ( such as housing and hairdressing ), the long - term convergence of productivity and living standards across the euro area would create a tendency towards price level convergence. countries with higher levels of economic development tend to have higher price levels for non - traded goods and services. while higher wages in the traded goods sector largely reflect higher levels of productivity, spillovers of wage increases to the non - traded goods and services sector often imply that wage levels in the economy as a whole will typically be higher in more developed economies. as the scope for increasing productivity growth is usually more limited in the non - traded goods sector, a general increase in wages as a result of productivity gains in the traded goods sector will raise the cost of producing non - traded goods and services. this leads to higher relative price increases for non - traded goods and services. in a dynamic context, as a less developed country is catching up with its neighbours, inflation in its non - traded goods sector could be rising more rapidly than in other countries, and as a result, inflation will be higher. this type of convergence normally takes place gradually and within certain limits among relatively homogeneous industrial countries, but could, of course, reach a much larger scale if differences in price levels among participating countries are more marked. 3. are divergent price developments a cause for concern? are differences in inflation among euro area countries a cause for concern? the short answer is, “ it depends ”. on the one hand, as i have just explained, differences in inflation rates among euro area countries had to be expected. they are in effect partly the result of the completion of the internal market and the creation of the single currency itself. on the other hand, if differences in inflation rates are quite large, they