Communication, Transparency, Accountability: Monetary Policy in the Twenty-First Century
Issing, Otmar, Federal Reserve Bank of St. Louis Review
COMMUNICATION: PAST AND PRESENT
How do agents deal with new information that may be of relevance to others? How do they convey their knowledge to the public? And what are the effects of such communication? Two very different historical examples illustrate the persistent relevance of this question.
In 67 BC, as piracy posed an ever greater threat to the supply of grain, the Roman authorities assigned command of a huge naval force to Gnaeus Pompeius, who then rid the Mediterranean of pirates within 40 days (see Issing, 1985). One year later, in his first political speech, Marcus Tullius Cicero asserted that the mere announcement of Pompeius's nomination for that mission had sent the price of grain in Rome plummeting on the same day.
In 1860, Lady Wilberforce, wife of the Bishop of Worchester, learned of Charles Darwin's new theory. She is said to have exclaimed: "Descended from the apes! Us! How awful! Let us hope that it is not true, but if it is, let us pray that it will not become generally known!"
In the first case, the mere announcement of the measure had the desired effect, fully in line with rational expectations theory. The second scenario highlights the intention to essentially ignore unwelcome information, or at least keep it in check.
In present times, as in the past, the role of information can hardly be overestimated. In our age of new media technology, the increase in the speed, scope, and volume of communication has been dramatic. These days, no significant institution--be it public or private, be it a central bank or a sports club--can survive without a press office. Media advisers are ubiquitous: They thrive on the belief that, if need be, even poor results can be given a positive spin, while incontestable successes will fail to have the desired effect if not communicated in the right way.
Since their beginning, churches have been especially aware of the importance of communication; and at the start of a new religion, the main aim is often to spread the gospel by word and deed, by sermon and miracle. (1) Do something good and talk about it. Be transparent--but only about the good deed?--and be accountable for your actions.
In the language of economists, such maxims quickly translate into complicated formulae and complex models. This should come as no surprise to anyone, as behind nearly every simple wisdom there lies an intricate web of complex relations.
This paper starts off with some general remarks and then moves on to discuss questions of communication policy and transparency in relation to a central bank. To what extent does a central bank have to be transparent to fulfill the accountability requirements of a democracy? What is the impact of communication and transparency on monetary policy efficiency and, hence, on monetary policy objectives? Finally, what are the implications for the communication policy of the European Central Bank?
THE MIRAGE OF UNLIMITED TRANSPARENCY
Today, there is a general consensus among central bankers that transparency is not only an obligation for a public entity, but also a real benefit to the institution and its policies. For a long time, however, central banks followed quite a different tradition. Sometimes unwittingly, sometimes quite deliberately--and very much in keeping with the prevailing zeitgeist--they evinced an air of discretion, to put it mildly. In the words of a later scathing critic,
Central Banking [has been] traditionally surrounded by a peculiar and protective political mystique. The political mystique of Central Banking was, and still is to some extent, widely expressed by an essentially metaphysical approach to monetary affairs and monetary policy-making ... The mystique thrives on a pervasive impression that Central Banking is an esoteric art. Access to this art and its proper execution is confined to the initiated elite. …