The Swiss National Bank’s shock policy U-turn in 2015 has gone down in the annals of history for roiling markets. Now two of the institution’s economists have, in effect, backed its approach to communications.
Thomas Lustenberger and Enzo Rossi argue that increased central bank communication over the years has “created confusion rather than clarity” and hasn’t helped investors and academics improve their macroeconomic forecasts.
That’s a rebuttal of the view that transparency helps central banks reduce market volatility and achieve their policy objectives. The financial crisis, in particular, ushered in a new consensus that giving investors forward guidance to steer expectations for interest rates would help officials navigate the worst recession in a generation.
Yet data from 73 countries “warn us that we should not expect too much from greater transparency and enhanced communication,” said the economists. The results are published in a working paper for the SNB – the central bank which, in a totally unexpected move two years ago, scrapped its currency cap just days after having affirmed its necessity.
The number of speeches rose nearly six-fold between 1998 to 2014 in the economies studied, yet Lustenberger and Rossi found “hardly any evidence” that the increased communication improved the accuracy of forecasts. The results indicate the situation varies from country to country, they said, adding that publishing voting records was actually detrimental to interest rate forecasts.
In fact, they found that while 20 of the institutions were at an optimal degree of openness and 23 below par in 2014, 30 central banks – including several euro-area countries – were too transparent. The authors also highlight that the practice of some rate-setters to air dissent in public – common at the Bank of England and the European Central Bank – can hurt a central bank’s message. SNB policy makers all adopt the same stance.
“A central bank that speaks with a cacophony of voices may, in effect, have no voice at all.”
With policy makers at both of those institutions heading for key decisions in the coming weeks, they may wish to consider Lustenberger and Rossi’s advice:
“One way to interpret the evidence” they wrote, is that “central banks ought to speak less often, especially those that have already achieved a certain degree of transparency.”