Marek Mora, CNB Board member
Meeting of the Central Bank Governance Network
Bank of Thailand
Bangkok, 20th – 21st September 2018
Ladies and gentlemen, dear colleagues,
It is a pleasure and honour for me to be given the opportunity to wrap up our today’s session on openness. Many important issues have been raised from various perspectives.
Before starting let me just mention two things. First, I would like to thank David Archer for organising this network. Since joining the Czech National Bank one and a half years ago, I have thought on several occasions that we were reinventing the wheel when we were trying to find solutions to some of our problems. And this meeting has confirmed this suspicion of mine and also gave me a guide on where to look for the answers. And second, let me use this opportunity to thank the Bank of Thailand for amazing organisation and hospitality.
Origins of openness in central banking
Obviously, openness – its understanding, the way it is conducted and practiced, the channels which are used or considered to be most effective – all that very much depends on the history and tradition of each central bank and on the country and culture in which the central bank operates. There is obviously not a single recipe for the best universal approach to openness.
Openness in central banking has been historically linked mainly to its core and most traditional business, i.e. to monetary policy. It was important for central banks to be understood primarily by the markets in order to make the monetary policy transmission mechanism more effective. This logic applies even more to those central banks with an inflation targeting regime, in which open communication of the central bank is a key factor of success and has become a policy instrument.
This is a difference from monetary policy practice in the past, say 20–25 years ago, when many central bankers believed that monetary policy decisions should take the markets by surprise in order to achieve maximum impact.
There are several theoretical and many empirical studies showing that trust in a central bank has a significant impact on inflation expectations. And trust is in turn very much dependent on knowledge people have about the central bank. Therefore, steering inflation expectations through central bank communication and trust-building (which both depend on openness) seems promising.[1]
Why is openness so high on central banks’ agenda NOW?
The need for openness has increased over time. In my view, there are several reasons for that.
First, we have just “celebrated” the tenth anniversary of Lehman Brothers. This and the consequent events have changed the public perception of banking and bankers. And the change was obviously negative. Bankers have been seen as greedy, irresponsible people who not only caused the most severe recent economic crisis, but on top of that who have not suffered themselves from this crisis (and who even gained in this crisis). This “Lehman Brother effect” applies in my view also to central banks. The crisis produced general distrust and suspicion, also about central banks, and more openness is seen as an instrument to regain trust!
Second, in the area of monetary policy, the financial crisis forced many central banks to use unconventional instruments. These instruments sometime produce complicated side effects. In particular, it turns out to be very difficult to explain to the public why price stability should be more important than any other policy objective (for instance the central bank’s loss or exchange rate stability), and why inflation should be positive (for instance 2% per year). And why not zero? And why couldn’t it be negative? The unconventional monetary policies also have major redistributive effects. There was a need to explain them in public, sometimes to defend oneself.
Third, many central banks have been given additional competencies over time. The Czech National Bank is a very good example. We are not only a monetary authority responsible for price stability, payment systems and cash circulation. We are also responsible for the supervision over the whole Czech financial system (i.e. not only for banks), for financial stability, and for consumer protection. We are also the national bank resolution authority. We have several mandates, some of them could be even considered contradictory. All that means that the need – not only among experts, but also among politicians and the broader public – to understand our policies has increased. And our duty is to explain all these policies. So, multiple mandates of the central bank increase the need to communicate and make the communication more complex.
Fourth, we are living in a new environment. There have been dramatic developments in information and communication technology and also new information laws have increased public access to what was previously private. As a result, all other actors are communicating, almost on a permanent basis. These new developments do not make it even possible for a public institution like a central bank not to communicate.
And last but not least, and more generally, I would also consider the requirements for openness as a counterbalance to central bank independence. Greater openness and transparency are a tool for greater accountability and legitimacy.
What are the main trends among central banks towards openness?
Almost all central banks continue using their traditional way of communication via reporting to their national parliaments and by publishing their main information and reports.
However, these ways of communication are nowadays not enough – for reasons mentioned above, but in some countries also for a lack of parliamentarians’ interest and understanding of the central bank’s functions.
There could be other ways of benefiting from openness. For instance, the Czech National Bank opened itself to an audit of its accounts by the Czech Supreme Audit Office. The findings of the Office have been very positive, among the best (if not the best) among Czech public institutions. This information was published and it also contributed to a better public reputation of the CNB.
Central banks explore more direct communication channels. There has also clearly been a shift in the communication target group: from analysts and financial markets to a broader public. The aim is to get across to everyone (the bottom of the pyramid).
The ways to do it are:
- Use simple, short, understandable, jargon-free language
- Communicate in a more targeted way (the one-size-fits-all approach does not work)
- Where appropriate, pictures could tell more than words
- The messages should be cascaded, put in layers in terms of detail (layer 1 the just the decision, layer 2 the decision and a bit of explanation, layer 3 the decision and a broader background)
- Communication and openness is a two-way street, it also includes feedback; an active strategy seems to work better than a re-active/defensive strategy (not everything should be corrected, we should simply continue telling our story to the public)
The means used for such direct communication range from very virtual ones (social media such as Facebook, Twitter, Instagram, LinkedIn) to very physical and tangible ones (open days, visiting centres, visits of senior representatives at schools and regions etc.).
Importantly, openness is not only communication. It could be also about the central bank making sure that the broader public perceives the central bank as doing the right job. For instance by securing access for everyone in less developed countries to an account and thus to credit. Financial education could be important for perceived openness.
External openness and communication also have an impact on the internal functioning of central banks. It affects organisational structures and working habits. It seems that monetary policy departments (especially in central banks using inflation targeting) are more at ease with openness than some other departments. There is an issue of internal communication. Being more open towards the broader public also forces central banks to be shorter and punchier in their internal communication. Those central banks seem to be more successful in openness when they are supported by top management. That also sends an important message to the staff. And also, it makes a difference if the communication department comes in early in the production chain.
But one should always keep in mind the question of effectiveness of central bank communication. How much did more openness contribute to better public perception? How do we measure it?
Possible limits to openness
The debate during the meetings has also shown that there are limits to openness. For instance, many central banks are involved in areas where they cannot reveal information because of legal limits to openness and because of professional secrecy.
There are also arguments that in monetary policy too much openness could be less than optimal. The argument is that central banks could give the impression that they know more than they do. There could be a risk if private agents rely too much on the wisdom of central banks. This argument has been brought forward by Lustenberger and Rossi (2017).[2]
There also seems to be a trade-off between gaining a broader audience by simpler communication and losing the experts. More is not always better! People perceive central banks as powerful and secretive on the one hand, but successful, responsible, professional and efficient on the other hand. Aren’t these just two sides of the same coin?
Conclusion
To conclude, openness has been high on the agenda of central bankers. This morning we have heard many invaluable comments on this issue.
My main take-away from the session this morning is that more openness and better communication are very important for central banks. But communication should not be a substitute for good policy! If central banks fail to maintain price and financial stability, even the fanciest communication using Facebook and Instagram won’t save it!
Thank you for your attention!
[1] Mellina, S., and T. Schmidt (2018), The Role of Central Bank Knowledge and Trust for the Public’s Inflation Expectations, Deutsche Bundesbank Discussion Paper 32/2018.
[2] Lustenberger, T., and E. Rossi (2017), Does Central Bank Transparency and Communication Affect Financial and Macroeconomic Forecasts?, SNB Working Papers 12/2017.