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Opinion polls show that there has been a gradual and deepening decline in people’s trust in institutions and experts across many countries. This has been caused by the lasting effects of the global financial crisis, increasing inequality, a more polarized political landscape and sections of society feeling their needs have been ignored such that they are now economically left behind. Communications can play a central role in restoring and maintaining trust but, if that trust is broken, it cannot easily be rebuilt. Efforts to restore trust will fail if communications are perceived as just another attempt at “spin”. Indeed, they may further erode trust.
Communications as a policy tool
I am interested in the work of central banks and how they engage with their audiences to communicate information and policy decisions. Designing and implementing economic policy successfully relies, in the main, on people’s reactions to such policy. In fact, people’s reactions, and their expectations around policy itself, can be a policy tool.
Economic processes work through the principle of self-fulfilling prophesies. If people believe a prophecy i.e. that there will be a shortage of car parts after the UK departed from the European Union, they will act on that belief and buy (and stockpile) more car parts than they would normally. This behaviour will put pressure on the supply of these parts, potentially causing a shortage. We witnessed similar behaviour in the run up to the first pandemic lockdown in 2020. People panic bought items such as dry foods and toilet rolls, thereby creating the predicted shortage that caused the panic buying in the first place.
Devil in the detail
These examples demonstrate why controlling the narrative is so important for politicians and policymakers and for employees working in central banks. There are various layers of complexity facing those communicating economic and monetary policy. Some information the Bank of England communicates is extremely technical and challenging, even for people who have studied economics. The challenge for the Bank’s employees is to communicate relevant technical information so it is readily understandable to the majority of the population, many of whom may not be familiar with economic terms, concepts and literature. Communicating key information such as economic forecasts is necessary, and important, as people are making big financial life decisions around loans, mortgages and pensions every day. Their decision making is informed by economic data, forecasts and interest rates.
In most democracies a lot of economic information and data is available to the general populace. The challenge lies in making people aware that it is there and then encouraging them to engage with it. If people knew how to find economic information, and use it in their own personal financial planning, it would inform their decision making. This should leave them better off. The overall economy should be in better shape as a result too. Whilst policymakers communicate policy decisions, and actively explore new channels for such communication, many people are either unaware that such information exists or do not pay attention to it. People make personal forecasts about what is going to happen in the future without referring to policy communications, even though there can be really useful information in these communications. Often, policymakers are struggling to be heard.
Ignore at your peril
In this way communication from a Central Bank can become a policy tool. Unfortunately, many central banks have been slow to appreciate this. A previous Governor of the Estonian Central Bank gave this insight; well-functioning government policy is of no interest to the average person. If people engage with it in normal times, they would get more out of it, but people rarely engage during these normal, business-as-usual times (when reactions matter a lot and can underpin economic stability). Whole areas of the populace do not engage with this kind of information and data because it does not interest them. They only pay attention when things go wrong.
People invest more effort in following politics, yet the Bank of England is a more powerful force in our lives than the government. What the Bank of England does today will affect our lives in many years’ time. Yet, when the economy seems to be bobbing along nicely, and performing well, no one is interested. This is a missed opportunity.
Building understanding of policy is fundamental to its effectiveness. Economic policy is intrinsically linked to personal finance, a topic with which there is often limited engagement, and which is poorly understood. People should be supported to gain a wider understanding of personal finance. It could be taught in the school curriculum. Providing better financial education to young people would change how future generations work with money. It could also encourage good financial habits.
Young people today have to make financial decisions that will impact them for decades to come, such as taking out a student loan, or buying a car on credit or contributing to their pension. They need to understand how interest rates or compounding work, the implications for their credit score and the distinction between good and bad debt. Too many people make financial decisions in an information vacuum or, more alarmingly, based on anecdotal evidence sourced from their social networks.
Samuelson’s monkey analogy
Among other channels, monetary policy works through financial markets. A central bank uses its influence over markets to steer the economy. At the same time, market movements inform the central bank where to steer the economy. Monetary policy relies on extracting accurate information from market prices, and yet monetary policy is reflected in those same prices. This two-way circular flow was famously compared by Paul Samuelson (1994) to the reactions of a monkey seeing its reflection in the mirror for the first time. The monkey reacts to its own reflection in the mirror, unaware that it is seeing its own reflection. Samuelson calls the two-way flow between the market prices and monetary policy the “reflection problem” and it is of central importance to debates about central bank communication and forward guidance.
Central banking and financial markets react swiftly to policymaking. Policymakers are both an observer and shaper in events. They have to manage the balance between these tensions. Having a conceptual understanding of policy is one thing, but formulating and implementing specific policy actions is a different challenge. For many people it may come as a surprise that understanding and interpreting financial data and statistics is actually more of an art than a science; relying on judgement and experience. Meanwhile, the infosphere within a central bank, or in policymaking circles, is becoming increasingly complex and challenging to navigate. This is not helped by the fact that data is often a lagging indicator, even more so when we consider the time it takes for information to be released to the public. It offers a snapshot in time rather than an example of what is happening ‘right now’
The medium is the message
Communicating effectively with a broader audience is key for all countries and their central banks. It will become increasingly important to improve people’s financial literacy and to upgrade communications capacity, harnessing new technologies, and using multiple channels, with many different paths from sender to receiver. Messages that connect with, and are relatable to, the intended audiences’ needs and interests, can also help build understanding. A key goal is to reach audiences directly, with less intermediation. That is especially important in countries where specialized economic media are still developing, or a particular political agenda is dominant.
With the growth of social media, it has become easier for people to express their views on public policies. Whilst this can sometimes spread panic, it has also increased the public’s expectations for transparency and accountability. Now policymakers face growing pressure to explain their actions better to a broader public, to ensure these actions are understood and secure the public’s support. Economic reforms are more likely to fail, or even be reversed unless they are understood, believed, and accepted by those whom they affect. The same principle applies to a wide range of policies—monetary, financial, fiscal, and structural. In future, policymakers will have to work harder to make their messages heard, understood, and believed.