Lyndon Johnson, the 36th US president, once said to his economic adviser, John Kenneth Galbraith: “Did it ever occur to you that making a speech on economics is just like pissing down your leg? It seems hot to you, but not to anybody else?”
Johnson might well have had central bankers in mind. Most of their speak feels hot to them and the small coterie of mostly financial sector economists who scrutinise central bankers’ every word and placement of punctuation marks. But the public has yet to feel the heat of the piss.
Yet central banks globally face a dilemma in that circumstances — including dissatisfaction with representative democracy — are pushing them to reach out more to citizens. Historically, central banks, including the SA Reserve Bank, have relied on accounting to parliament as the main pillar of their accountability to the public.
The challenge for central banks’ efforts is that the public don’t pay much attention to what bankers have to say. That’s either because they find central bankers’ communication dead boring, or the relevance of the messages to their day-to-day lives isn’t clear.
But central bankers keep trying, driven by two reasons, according to a recent paper by economists led by Princeton University’s Alan S Blinder, a former vice-chair of the US Federal Reserve.
The first has to do with attempts to influence citizens’ expectation of future inflation, a key tool in monetary policy management. The second is about the need for central banks to account to citizens and therefore inflate citizens’ trust in them.
As Blinder and company point out, for communication to take place there must be a sender and receiver. But non-experts often aren’t listening. Better communication with the public could provide central banks with an additional tool for the conduct of monetary policy. It can enhance the effectiveness of monetary policy, transparency and accountability. The challenge is getting it right.
The paper by Blinder and company reviews several approaches that have been, or are being, tried by central banks. These include the use of social media. In some central banks, including the SA Reserve Bank, the head of the bank uses his own Twitter account over and above the institution’s.
The report singles out the Bank of Jamaica for its “most imaginative use” of social media. “It uses music videos to help explain its inflation targeting policy, and all the material showcased on its social media accounts uses language that people can relate to their everyday lives.” For example, one of the messages is: “Low, stable and predictable inflation is to the economy what the bassline is to reggae music.”
Central banks have also begun interacting with the public, something the SA Reserve Bank has been doing since the introduction of inflation targeting in 2000. The paper’s authors cite the Bank of England’s Future Forums, where the public “shares ideas, views or concerns” with bank officials. The Federal Reserve and the European Central Bank have included listening events as part of their recent monetary policy strategy reviews.
Ensuring that appropriately packaged communication reaches the public is a necessary but not sufficient condition for successful central bank communication. “The signal must be processed appropriately and the information that is transmitted needs to affect beliefs or behaviours. The basic communication problem is simple, though the solution isn’t. Households and firms have a low desire to be informed about monetary policy and are relatively inattentive to news about it.”
Blinder and company add that households and firms will be less attentive to central bank communication if they don’t understand what the central bank’s monetary policy aims for, “or how its policies affect economic conditions, or how these conditions affect them”.
They caution of the “severe limits on what communication with the broad public can reasonably be expected to achieve”. That’s because ordinary people don’t have the time or energy to invest in understanding monetary policy. But “the game is worth the candle” because of all the potential benefits, including greater accountability and public trust.
The other reason central banks should try harder was articulated by Princeton economist Edwin Kemmerer in his 1919 book The ABC of the Federal Reserve System. Kemmerer, nicknamed “The Currency Doctor” because of his work around the world, including SA in the mid-1920s, advising governments on monetary matters, cautioned: “In a democracy, however, widespread ignorance among the voters of the country’s financial system is fraught with danger.”
To avert the danger Kemmerer warned about, central bankers must try harder to ensure the public also feel some of the warmth of bankers’ piss.
• Sikhakhane, a former spokesperson for the finance minister, National Treasury and SA Reserve Bank, is editor of The Conversation Africa. He writes in his personal capacity.
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