More communication may hamper monetary policy, paper says

Central banks that communicate frequently or have more members on their monetary policy committees risk conveying a “cacophony” of messages and causing macroeconomic forecast errors, a paper published by the Swiss National Bank finds.

Does Central Bank Transparency and Communication Affect Financial and Macroeconomic Forecasts? by Thomas Lustenberger and Enzo Rossi researches the effects communication has on policy transmission.

The authors rely for their analysis on a large sample of countries for financial and macroeconomic variables important for monetary policymaking provided by the private sector.

“The results shown in this paper warn us that we should not expect too much from greater transparency and enhanced communication,” Lustenberger and Rossi say. “We provide compelling evidence that, in general, central bank openness is not an effective instrument to improve the accuracy of private forecasts.”

Their conclusions are unambiguous. “More communication produces forecast errors and increases their dispersion.” A central bank that speaks with numerous voices may convey a confusing narrative. Thus, speaking less may be beneficial for central banks that want to raise predictability and homogeneity among financial and macroeconomic forecasts.

The authors also link central banks’ independence with ineffective communication. “Greater central bank independence also tends to worsen the quality of forecasts, perhaps by increasing the size of monetary policy committees that may lead to cacophony.”