##s, but generally subject to other objectives, such as inflation and financial stability considerations. while there are good arguments for forward guidance, particularly during times of crisis, providing forward guidance to the markets has not been plain sailing, and has been challenged on both theoretical and practical grounds. as argued by prof marcel fratzscher, formerly of the ecb and currently president of the german institute for economic research bis central bankers ’ speeches in berlin, there are major risks and costs from over - reliance on communication strategies. his concerns are three - fold : first, the dominance of the voice of central banks in financial markets has resulted in price movements becoming a reflection of responses to their statements and action, rather than to changing economic and financial realities. second, central bank communications dominance could “ crowd out ” private sources of information or analysis, depriving the monetary authorities of an independent view of trends that sound policy - making would find helpful. and third, central banks risk losing credibility, when overcommitment to a specified path of action turns out to be a misleading assurance. he argues against central banks giving forward guidance, including announcements about when they will begin to tighten monetary policy and by how much. rather, “ they need to reintroduce true two - way risk, so that asset prices again reflect underlying fundamentals … central bankers need to communicate more clearly how they think about risks and opportunities in the economy and financial markets, and then let private investors decide the balance of risks and reward for themselves. ” other critics have focused on the usefulness of forward guidance. charles goodhart, for example has been skeptical of its usefulness, particularly over longer horizons, where guidance is most needed. specifying paths is only as good as the forecasts upon which they are based. his research shows that while central bank forecasts are very good up to two quarters ahead, they are “ dire ” at longer time horizons. furthermore, he finds that existing empirical studies have failed to show that markets coordinate on the published forward guidance of central banks. his own research in fact found that in sweden and norway, the official path adjusts to the market rather than vice versa, except on short horizons in sweden where a two - way relationship exists. similarly, his review of state - contingent forward guidance concludes that while it has been largely successful in influencing the short end of the yield curve, they have no effect over longer horizons. in general, where state contingent guidance has been given, it is clear that the conditional

illustrate these points with the example of central banking which, of course, is the example i know best. there is a broad global consensus on the model of central banking that we use in south africa. in that model, a central bank is independent, but independence does not mean that the central bank can do whatever it pleases. the central bank is given independence to achieve specific mandates. those mandates are things most people agree are in the interest of society. our mandates, in common with many other central banks, are for price and financial stability. we have a toolkit to achieve these mandates. we can set interest rates and we can enact a range of regulations, supervise financial institutions and intervene in the financial market to counter dysfunction and instability. central bank independence came about because we tried central bank dependence and it did not work. in countries where central banks are captives of the political process, they tend to be willing to fund whatever government wants, or to adjust monetary policy to suit election timetables. ultimately, these come at a huge cost to the economy, paid with an inflation tax, which is levied disproportionately on the poor and vulnerable people in society. this discussion draws on paul tucker, unelected power, 2019. you also get central banks that let banks misbehave, take huge risks, then extract bailouts from the public purse to save the financial system. in the short term, central banks can make themselves popular by providing cheap money and encouraging credit sprees. conversely, central banks can also make themselves deeply unpopular by interrupting the ruling party by insisting on protecting price and financial stability. but ordinary people want stability. they do not want the currency crashing ; they do not want prices in the shops spiralling ; and they do not want to worry if their money in the bank is safe. simultaneously, most citizens do not have the time or the power to enact policies to protect price and financial stability. what they have is us. this is not to speak disparagingly of our stakeholders, but we cannot expect citizens to master these issues. they have their own priorities ; they have their own projects. there is too much information for them to understand everything and it is not their job to do the things we are responsible for. this is a phenomenon economists call ‘ rational ignorance ’. just like with smartphones or cars, you want to be able to leave the technical details to someone else and rely on the system to work. of course