BoE paper: simple communication can backfire

A new piece of the research from the Bank of England has stressed the need for complementing simpler communication with improved engagement and education.

In their paper, Andrew Haldane, Alistair Macaulay and Michael McMahon develop a framework that highlights how simplified central bank communication can backfire.

“Simplified communication can increase the proportion of the population paying attention to central bank messages, which also builds trust and as a result increases welfare,” the authors explain. However, this newfound trust cannot be maintained if households observe reality diverging from the central bank’s communication signal. Simplified communication is therefore a mere “transitory state”.

Over the past decade, central banks have looked to tweak their communication approaches, as many were concerned their communication with the general public was too difficult to understand. This could hamper policy-making and undermine trust.

In their paper, the authors note trust and understanding are often seen as “twin deficits” and have the potential to impinge on the efficiency of monetary policy, and potentially, hamper an operationally independent central bank in meeting the terms of its “social contract”.

As central banks simplify how they communicate the more technical aspects of their mandate, people may develop a false sense of certainty about the central bank’s views about the economy.

The three Es

Haldane, Macaulay and McMahon set out a new framework to help central banks manage expectations when it comes to simplified communication, dubbed the “three Es” – “explanation, engagement, education”.

“They [central banks] must explain their framework and, where appropriate, target, and they must engage and educate them [the public] to understand what they do and why,” the authors write. The success of these communication policies, the authors continue, should not be measured by the ability to reach the most people, but by increased engagement beyond the “current small core audience”.

The authors analyse various channels through which central banks could engage various groups of the public. “Communication may need to be simple, relevant and story-based to become convincing and credible to a wider audience,” they explain. “Traditional central bank communications tend to fail on all three fronts.”

To ensure simpler communication works, central banks need to create context, which can be achieved through stories. Social media has become one channel through which central banks have begun storytelling. Twitter is the medium of choice for many given the format it takes – each tweet can act as a new chapter in the same story.

The authors also recommend engaging the audience in a more direct manner, normally through face-to-face meetings. Such conversations can help central banks contextualise how their messages are being received and ensure their communications are conveyed in a way which addresses people’s concerns.

Education is essential

It is the authors’ final ‘E’ that acts as the lynchpin. “Even engaged and technical audiences need regular educational briefing,” they write.

Currently, inflation and GDP – key concepts which are central to policy discussions – are understood by only a small minority of the general public. “The public rarely understand there may be a relationship between inflation and unemployment,” the authors write.

Central banks have adapted their communication strategies through more accessible language and direct engagement, but the use of alternative forms of media may also help. When the Bank of Jamaica switched from targeting the exchange rate to targeting inflation, the central bank – in order to speak the language “of the people” – released a series of videos featuring top reggae stars, comparing inflation control to the bassline in reggae music.

An increasing number of institutions have started to use visual forms of media to explain decisions, as well as current economic issues and research. For example, the ECB has used popular YouTuber Simon Clark to explain what a central bank is.

“The design of communication strategies are likely specific to each objective, especially since the audiences are possibly different,” the authors conclude. Central banks must therefore remain “steadfast” in their efforts to reach a broader audience, adapting their policies to the scenarios currently in play.