Transcript University

Central bank transparency and
communication revisited
What can we learn from the financial crisis ?
Bernhard Winkler
European Central Bank
Policy session on central bank communication,
“New challenges to central banking in the global financial system”
Namur, 11-12 June 2009
Views expressed are not necessarily those of the ECB
Outline
•
Transparency, clarity and communication
(revisited)
•
Communication and the ECB’s monetary
policy strategy
•
Lessons from the financial crisis ?
Why transparency ?
• Independence and accountability
• Rise of direct inflation targeting
(vs. intermediate target strategies)
• Increased role of financial markets
• “Managing expectations” (Woodford)
• General presumption: more information
better (market efficiency)
 monetary policy effectiveness / credibility ?
PART I
Transparency, clarity and
communication:
Dimensions and trade-offs
Cf. Winkler (2002), ECB Working Paper No. 26
Dimensions of “transparency”
(A differentiated view)
• openness
• clarity
• common
understanding
 disclosure of
information
 process, simplify
and interpret info.
 “shared”
interpretation
Transparency in the literature
Informational assumptions:
SENDER:
Central Bank
Information
RECEIVER:
Public
• CB incentives to exploit
info. asymmetries
(BarroGordon model)
• Know “too much”
(CK, rationality, Bayesian
uncertainty, homogeneity)
• Know “too little”
(multiplicity of eq.,
restrictions on beliefs,…)
Monetary policy strategy and communication:
The transparency triangle
OPENNESS
CLARITY
(EXTERNAL
COMMUNICATION)
INFORMATION
EFFICIENCY
(INTERNAL COMMUNICATION)
• Examples: monetary targeting, inflation forecast
targeting
• Common understanding alleviates the trade-offs
• Strategy as “common language”( three Cs)
Monetary policy strategy and communication:
The clarity triangle
CLARITY OF OBJECTIVE
ECONOMIC
ASSESSMENT
POLICY
/ INCLINATION
• Example: different interpretations of inflation targeting:
target rules vs. instrument rule
• Example: different roles of inflation forecasts
(policy input/output) vs. communication on forward policy
PART II
Monetary policy strategy as a
framework for decision-making
and communication:
the example of the ECB
Role of strategy for communication
Definition of the objective
Internal aspect
External aspect
Decision making
Communication
Primary objective of price stability
monetary policy
decisions
Economic
Analysis
crosschecking
Monetary
Analysis
Economic information
Definition of price stability
• Aim at year-on-year increases in the HICP
for the euro area of below but close to 2%
• To be maintained over the medium term
• Anchor for price expectations
• Yardstick against which Eurosystem can be
held accountable
• Precludes prolonged inflation or deflation,
but not imply “mechanical” policy rule
Role of staff projections
important input in policy decisions
Conditional projections, not forecasts
Assumptions, models and staff expert
judgement
Staff responsibility, not “owned” by the
Governing Council
Avoid “self-fulfilling prophecies”, circularity
Not a “sufficient statistic” for policy decisions
Why two pillars?
• Considerable model uncertainty about the
structure of the economy
• Role of money and financial variables difficult to
capture/integrate in mainstream models
• Prominent role for money underpins mediumterm orientation
• Money and credit expansion also often associated
with unsustainable asset prices / financial
imbalances (leaning against the wind ?)
• Diversified approach through cross-checking
between “pillars” improves robustness (e.g. post2003 and Dec. 2005, financial crisis)
Features of the ECB’s strategy
• Quantitative definition of objective…
but no precise point target or fixed horizon
• Two pillars take into account all information…
but no unstructured “look at everything”
• No commitment to simple rule…
but systematic rule-based framework
(“procedural rule”)
• Strategy relatively complex…
but: so is reality
Transparency and predictability
• Should monetary policy be boring (M. King)
and predictable?
• Markets reacting to data vs. reacting to CB
communication
• Could CB communication crowd out
private signals (Amato-Shin)
• Collegiate vs. individualistic committees
• Relevant horizon (preparing markets vs.
“systematic” policy over medium-term)?
Communication on “forward” policy
Fed experience
• Policy directive vs. balance of risks
• Standardised vs. ad hoc language
(“considerable period”, “patience”, “measured pace” … 2003-2004 episode)
“more detailed language has considerable advantages over simple, discrete categorisation of risks”
“Some information unavoidably gets lost when the central bank tries to describe [those] views with
a simple summary, like a balance of risks assessment, a point forecast, or a brief statement”
“market participants in some circumstances will not recognise the conditionality of the outlook”
“difficult to get a committee with diverse views to agree on a detailed statement” (Kohn und
Sack, 2003)
• Publication of longer-term FOMC forecasts
(implicit inflation targets?)
Publishing the “forward” policy path
- the last frontier of transparency ?
Championed by Woodford & Svensson; pioneered by NZ,
NOR, SWE
• Persistent deviations of market expectations from
published paths (Central banks leading or following
market expectations ?)
• Continued episodes of policy surprises
• How deal with policy disagreements ?
• May forward communication unduly condition policy
choices (esp. in crisis context) ?
PART III
(Tentative) lessons from the financial
crisis ?
Lessons on pre-crisis period (I)
communication
• CB communication crowding out private
information (Amato-Shin) ?
• “Excessive transparency” contributing to
underpricing of risks by markets (Ferguson) ?
• “Excessive credibility” of monetary policy
contributing to moral hazard and asset price
boom (“Greenspan put”, M. Miller) ?
• Role of communication (“measured pace”, Fed,
“credible alertness”, ECB) and predictability in
conditioning gradual withdrawal of policy
accommodation (2003-2007) ?
Lessons on pre-crisis period (II)
strategy
• Inflation targeting necessary but not sufficient: move to
“intelligent” IT and longer time horizons (J. Gieve) ?
• Were interest rates “too low for too long” (M. King) post
2003 ?
• Need to pay closer attention to money, credit and sectoral
balance sheets/flow-of-funds (M. King, P. Tucker)
• Reverse Greenspan doctrine on asset prices: “can’t lean”
(against the wind), “can clean” (up after the bubble), Bill
White (BIS) ?
• How take into account asset prices in inflation targeting
(SWE, NZ) ?
• Enhance further the broader based approaches of ECB’s
two-pillars and BoJ’s “two perspectives” ?
Lessons on crisis period (I)
(general) communication
• Under increased uncertainty: clear CB communication
more important … but more difficult (unforeseen
contingencies / consensus building)!
• ECB mantra: “never pre-commit” and “always do what is
necessary”
• Focus on medium term objective is key to avoid trade-off
(long-term) credibility vs. (short-term) flexibility
• Central banks as “anchor of stability” and anchor for
inflation expectations
• Key role of confidence and expectations channel (selffulfilling feedback loops; role of projections ≠ forecasts)
• Communicate uncertainty of assessment but avoid central
bank communication becoming itself source of uncertainty
Lessons on crisis period (II)
(specific) communication
• Communication/ commitment on future policy as
(additional) policy tool at zero lower bound ? Credibility
of price level targeting (Woodford/Svensson) ?
• Hierarchy of communication on monetary policy and nonstandard measures: separation vs. integration ?
• Communication on non-standard measures: enhanced
credit support (ECB), credit easing (Fed), QE (BoE)
• Communication on money and non-standard measures: as
additional policy instrument (≠intermediate target ?), i.e.
“printing money” (M. King, BoE) vs. CB balance sheet (Fed,
BoJ) and focus on specific credit markets (Fed)
• Interaction of communication on future policy and nonconventional measures (e.g. Riksbank bringing forward
policy action)
Lessons on crisis period (III)
strategy
• Switch to price level targeting to implement optimal
monetary policy rule (Woodford/Svensson) at zero lower
bound ?
• Mainstream New Keynesian (DSGE) models irrelevant for
central bank policy during crisis (Goodhart, Buiter) ?
• Renaissance of money and credit during crisis ? E.g. BoE
and discussion at Fed about re-introducing monitoring
ranges for monetary aggregates (FOMC minutes,
February) to gauge CB balance sheet expansion but also
reflecting concerns over need for medium-term anchor
and exit strategy
Lessons on crisis period (IV)
independence and mandate
• Boundary and linkages between monetary and
financial stability ? Role of central banks in
financial stability / ESRC ?
• Central bank independence and the boundary
between monetary policy and fiscal policy in
context of non-standard measures (Volcker,
Buiter) ?
• Central bank independence from financial markets
as important as political independence (Blinder)
Conclusions
• Transparency is about effective
communication
• A monetary policy strategy provides a
framework for credibility, consistency and
continuity in (internal and external)
communication
• The ECB’s institutional set-up, its strategy
and communication – while more complex
– has proved robust in the crisis