Communications Challenges for Multi‐Tasking Central Banks: Evidence, Implications

• DOI: http://doi.org/10.1111/infi.12043
• Author: Pierre L. Siklos
• Published date: 01 March 2014
• Date: 01 March 2014

Communications Challenges for

Multi‐Tasking Central Banks:

Evidence, Implications

Pierre L. Siklos

Department of Economics, Wilfrid Laurier University, Viessmann European

Research Centre

Abstract

The communication s challenges facin g central banks that s hare macro-

prudential responsibilities with other agencies are daunting. Central

bank surveys and an index of central bank transparency reveal that

central banks have ado pted the necessar y instituti onal arrangemen ts to

communicate eff ectively a price s tability objec tive. However, their com-

munications strategy is ill suited to dealing with financial stability

issues. Recent events require a departure from the pre‐crisis narrative

An earlier version of this paper was presented at the joint De Nederlandsche Bank,

European Central Bank and University of Gronin gen conference, ‘Monet ary Policy and

Financial Stability –What Role for Central Bank Communication?’, and at the Universit y of

Münster. Comments by David Arc her, Gabriele Galati, conf erence participant s, two anony-

mous referees and the editor are gratefully acknowledged. I am also grateful for an

International Oppo rtunities research grant f rom Canada’s Social Scie nces and Humanities

Research Council and a CI GI‐INET research grant. Part of the resear ch for this paper was

undertaken while the a uthor was a visiting scholar at Prince ton University and the Ba nk of

Japan. I am grateful to the B ank for International Settlements for m aking available some of

its survey data. Result s referred to but omitted from the main body of th e paper are available

in a separate Appendix on request.

International Finance 17:1, 2014: pp. 77–98

DOI: 10.1111/infi.12043

© 2014 John Wiley & Sons Ltd

that entailed a predictable relationship between inflation and output

gaps, of which financial stability was considered a by‐product. I argue

that central banks should adopt a hybrid form of inflation and price

level targeting as well as require that macroprudential regulators jointly

communicate thei r determination t o act in concert, es pecially when the

financial system is under stress. The current practice of announcing the

rationale for the setting of monetary policy instruments is no longer an

effective communication strategy when central banks must also evince a

concern for financial stability.

I. Introduction and Motivation

During the so‐called ‘Great Moderation’(Bernanke 2004) that lasted from the

mid‐1980s until the global financial crisis of 2008–09, central banks began to

communicate much more frequently with the public. In particular, central

banks have become more vocal about their actions past and present, and the

circumstances under which they would act in future. Speeches, written notices

and reports complemented and could, at times, substitute for policy rate

changes as tools to influence the public’s expectations about the stance of

monetary policy. This improved communication may have contributed to the

low frequency of policy rate changes, as shown in Figure 1.

1

Prior to the financial crisis, the cornerstone of central bank communica-

tions consisted in emphasizing the importance of the price stability objective.

To underscore their commitmen t to controlling inflation, central bankers

often referred to policy rules such as the Taylor Rule (TR) to explain

their decision‐making process and to convey their intention, normally, to

adhere to such rules. Poole (2006), for example, argued that the TR made it

much easier for the public to interpret how the Federal Reserve Bank set, and

was likely to set, the stance of monetary policy. Central bankers around the

world have made similar claims. Reliance on a policy rule is one of the

communications successes of the last two decades as it is seen as a vehicle to

anchor inflationary expectations. Indeed, in all of the economies shown in

Figure 1, inflation has remained low and stable for well over a decade.

Nevertheless, cen tral bankers do not c laim that rules sho uld be adhered to

1

The measures of the ef fectiveness of central bank communica tion used in this study only go

back to 1998, the star ting point of the data shown in Figure 1 . Data after 2009 are not shown

and are less informat ive since, with few exceptions (e.g. Austral ia, the euro area and Sweden),

there have been fewer policy r ate changes, as central banks cl osed in on the zero lower

bound. Figure 1 also h ighlights the fa ct that policy rate s have tended to change by incre-

ments of 25 basis poin ts (bp) or fewer.

78 Pierre L. Siklos

© 2014 John Wiley & Sons Ltd