Communication challenges for the ECB

Opening statement delivered by Professor Otmar Issing, Member of the Executive Board of the European Central Bank at the CFS research conference "The ECB and its watchers II". Panel II: "The ECB and Its Communication Strategy", Frankfurt, 26 June 2000

The ECB has been in existence for little more than two years; for almost exactly 1 1/2 years now it has carried responsibility for monetary policy in the euro area. On most counts its brief life has been a remarkable success story. As regards the technical side few observers would have predicted that the challenges associated with, first, the changeover to the single currency and, second, the "year 2000-problem" would have been mastered so smoothly. The new payments system (TARGET) and the new unified money market have been operating without noticeable glitches almost right from the start.

Most importantly, price stability, the primary objective assigned to the ECB by the Maastricht Treaty, has been maintained in the euro area to a degree that few would have thought possible only a few years back. Given the lags involved in monetary policy, a significant part of the credit for this commendable performance is due to national central banks' policies in the run-up to monetary union. Looking forward, financial market indicators and survey information suggest that investors and the wider public expect that price stability is here to stay. For a young institution this level of credibility and confidence in the fulfilment of its mandate could not have been taken for granted. It shows that the ECB's monetary policy strategy and the policy actions based upon it are expected to continue to deliver price stability. This is what ultimately counts - and should be counted - as a measure of the ECB's success, regardless of what one may wish to say about improving this or that detail in its communication efforts.

I do not say this in order to belittle the importance of communication - quite the contrary. There seems to be a "communication gap". On the one hand, few observers contest the success and credibility of the ECB in delivering on its primary objective and on the appropriateness of most of its policy actions in this regard. Even professionally critical ECB watchers - like the groups represented here - have by and large found it impossible not to - albeit reluctantly - concede that "the Eurosystem does not appear to have committed any major policy errors", as one report has recently put it. This is no mean achievement. On the other hand, however, the overall perception of the ECB by the public, academics, financial analysts, market participants and, not least, journalists continues to remain - at best - rather mixed. This indeed indicates a communication problem.

Part of the "communication gap" probably has to do with the media's and the public's disproportionate attention on the exchange rate rather than ECB's mandate of protecting the internal value of the currency. The widespread inclination to view the day-to-day strength of a currency on the foreign exchange markets as the key yardstick of success is not very helpful. Monetary union is about creating conditions for lasting stability and prosperity in Europe. By contrast, the media, on many occasions, seems to see it primarily as some kind of ongoing "olympic race" with other important currency areas.

The verdict among most, if not all, our "watchers" seems to be that - broadly speaking - the ECB has done a good job but has not been very effective in presenting and explaining itself. Now, to my mind at least, this situation is preferable to a state of affairs where the opposite was true, i.e. if clearly mistaken policies had been brilliantly explained. Nevertheless, communication is not simply a matter of marketing and public relations. It goes deeper than this. Let me in the remainder of my remarks offer you some thoughts on the rather unique challenges that the ECB faces in this regard.

At the centre of criticism of the ECB's communication performance has been the debate over transparency. Here criticism of the ECB's monetary policy strategy as unclear needs to be distinguished from questions about the effectiveness of communication within the context of the ECB's chosen strategy, i.e. how well particular policy actions are motivated, explained and understood within that framework. Both of these aspects have to do with the communication function of a monetary policy strategy. A second set of issues, which I will address in the final part of my remarks, has to do with what could be termed "communication policy", i.e. the particular instruments and channels for external communication that the ECB has adopted.

Advancing the understanding of what monetary policy sets out to do and how it goes about achieving its objective - among professional central bank watchers of all sorts, market participants and, not least, among the general public - is paramount for any modern central bank. It is crucially important for a young institution lacking a track record like the ECB. Communication issues have generally become more important for central banks as the role of expectations and financial markets in the transmission process of monetary policy has increased. Central banks increasingly recognise that successful communication helps them work in tandem with financial markets and in general will contribute to achieving policy objectives more effectively. Finally, a culture of openness and dialogue should help central banks to earn the trust of the wider public, which is particularly important for a central bank that is both new and independent.

There are thus legitimate demands on transparency in monetary policy-making. Indeed, promoting transparency is in general in the central bank's own self-interest. However, it is important to recognise that there are limits to the degree of transparency that central banks can realistically be expected to supply. This is particularly true for the debate on the ECB's monetary policy strategy, which has been criticised as unclear and non-transparent. In our understanding, a monetary policy strategy is primarily a framework for organising and structuring analysis for the purpose of internal decision-making and, at the same time, for providing a vehicle for external communication. It is nothing more or nothing less.

What are the critics asking of the ECB? Often they seem to be asking rather more clarity, predictability and certainty than can be supplied in the face of an environment that is itself anything but clear, predictable and certain.

First, there is a justified demand that monetary policy should always be explained in a coherent and consistent framework. Providing such a framework is precisely the purpose of a monetary policy strategy in the first place. The stability-oriented monetary policy strategy followed by the ECB provides for the necessary degree of flexibility - which should not be confused with mere arbitrariness - in the face of the unusual degree of uncertainty associated with the effects of the single currency on economic structures and on behavioural relationships in the new monetary area.

Second, underlying much of the criticism, by contrast, there seems to be the notion that monetary policy can be (or should be) reduced to some simple and time-invariant "reaction function" or a simple decision rule, which links interest rates to a small number of economic variables or indicators in a determinate fashion. Such expectations of monetary policy will be hard (and costly) to fulfil in an economic environment, which is uncertain, complex and constantly evolving in unpredictable ways. Thus there tends to be a significant gap between any simple, stylised monetary policy rule and monetary policy strategies pursued in practice. The ECB's strategy - eschewing simple rules - is open, transparent and honest about the uncertainties facing monetary policy. Pretending that the world is simpler or more certain than it actually is does not make for a good recipe for monetary policy. It advances neither genuine understanding of monetary policy nor genuine transparency.

Third, many observers - particularly in the financial markets - may, in the end, not be that interested in a genuine understanding of the complexities of monetary policy. What may matter most to them, understandably, is their ability to predict correctly and precisely the next interest rate move. For that purpose, the markets would probably love if the central bank simply pre-announced a path of future interest rates in advance. Most central banks are reluctant to go much in that direction and most - not just the ECB, is struggling to find effective ways to signal future policy intentions in a way that is clear and not misleading. Statements about future policy plans can only be of a conditional nature, where it is impossible to give a full description of all relevant contingencies. There is thus an inherent risk that such statements can be mis-read as indicating a commitment to a particular course of action. This will either be felt to impose undue constraints on the central bank's necessary freedom to always take the decisions best suited to fulfil its mandate or it will lead to market expectations being upset and may thus turn out in the end to increase uncertainty and volatility.

To my mind - in the presence of pervasive uncertainty faced by the ECB - there is no convincing alternative to the arduous task of continuously explaining how we arrive at, confirm or refine our common assessment of the outlook for price stability meeting by meeting, month by month. This assessment is done in the context of our strategy and is conducted in a systematic manner, even if our strategy may seem unduly complex to some observers. We make every effort to provide an honest, open and transparent account of our common assessment. On the other two alternative routes to transparency outlined above I am somewhat more sceptical - namely adopting simple rules or effectively pre-announcing policy in advance. At most these can be regarded as second best substitutes for genuine transparency and understanding or as auxiliary commitment devices in the absence of credibility ^[1]. At worst they may convey a superficial and misleading sense of transparency and a spurious degree of accuracy which could ultimately backfire on credibility.

In short, there seems to be an evident demand not only, and not primarily, for transparency and openness (in the strict sense of the release of more information) but also for clarity, simplicity, certainty, precision and predictability in the conduct and communication of monetary policy ^[2]. I have argued that there are limits to the extent to which such demands can and should be satisfied in the face of a complex, uncertain and changing environment. There therefore appears to be a tension between the inevitable complexity of analysis and judgement and the need to provide simple and clear explanations.

In an ideal "full information" world, transparency and clarity would coincide; the public could observe economic data and central bank objectives, it could then perfectly deduce and predict its optimal policy. In such a world there would be no need for communication or for a monetary policy strategy, let alone one with distinct pillars or features like a "reference value" or a "prominent role for money". The role or "weight" of any particular indicator as part of an optimal policy could only be "optimal" but not "prominent", nor would there be a need for such a thing as a "reference value". This is a world that seems to be the benchmark for much of the academic criticism of both the ECB's monetary policy strategy and its approach to transparency. However, this is manifestly not a world that is very relevant for practical monetary policy-making.

It is helpful, instead, to think of a monetary policy strategy not so much in terms of a strict and fixed decision rule, however complex, to be followed under all circumstances but rather as a somewhat looser framework for structuring, analysing and presenting information in systematic way. Such a framework is helpful both for the purpose of internal decision making and for external communication. In this perspective, a "rule" is not to be seen as a mechanism that automatically drives policy decisions, but as a benchmark or "reference point", that provides a disciplining focus for analysis and communication. It seems, however, that quite a number of - largely academic - critics have such stylised decision rules in mind as their reference for passing judgement on the ECB's monetary policy strategy. From such a perspective, the two-pillar strategy invariably comes across as contradictory. Our academic ECB watcher groups have therefore tended to propose the well-established "pure strategies", with which they are most familiar. These are monetary targeting and inflation targeting, even though - most recently - at least one of the groups seems to have opened up to the possibility of considering something resembling a two-pillar approach with a distinct role for money. However, in this framework, money and credit are related to asset price inflation rather than overall inflation as in the traditional monetarist framework, which has inspired the ECB's focus on a "reference value" for money. It is interesting to note that all camps claim the attribute of transparency for their own favoured approach, which is, in every case, in contrast to those of the other groups. This seems to prove that transparency is a rather subjective notion and may have a lot to do with familiarity.

When judging the ECB's strategy, a second and more natural "point of reference" - apart from stylised "textbook"-type models - is provided by the monetary policy practice followed by other central banks. It is not at all surprising that in surveys assessing the transparency and understanding of central bank policies, the ECB still trails behind when compared to such familiar institutions as the Federal Reserve, the Bank of England and the Bundesbank. These higher marks for long-established central banks are awarded despite notable differences in their strategies and approaches to communication and - in the case of the Fed - a difficulty in pinpointing any officially articulated monetary strategy at all. This observation strengthens my conviction that, whatever one's judgement about other central banks' approaches, the ECB had to find its own strategy best suited to its own particular circumstances.

Even long-established central banks often had to grapple with immense communication challenges. From my own personal experience I would only mention the period 1994-95 when money growth was widely out of line with the target corridor set by the Bundesbank. An extreme case was that which occurred in April 1996 when the Central Bank Council of the Bundesbank decided to decrease both the discount and the lombard rate by 50 basis points although the money stock M3 was growing well above the upper limit of the target corridor of 4% to 7%. This decision was taken because detailed investigations came to the result that, at that period, M3 growth was distorted upwards by several special factors. At the same time, other important indicators, such as real economic growth, the exchange rate of the German Mark and commodity prices pointed to favourable price perspectives. When motivating our interest rate moves, we had to explain very carefully why we discarded the information coming from money at that particular time. Such episodes did not damage the credibility of the Bundesbank in the eyes of the German public, but I am not sure that similar communication challenges can be handled as smoothly when a track record of performance and of mutual trust and common understanding is still lacking.

It seems to me that the ECB's monetary policy strategy holds a comfortable middle ground between those central banks, which seem to have adopted strategies, and a corresponding rhetoric, that appear closer to textbook approaches and those - like the Fed - who have not felt the need to elaborate any written-down strategy at all. The fact that our watcher groups are split between those advocating the abolition of the second pillar and those pushing to delete the first pillar seems to confirm that, in fact, both pillars are necessary. Moreover, on average, modern central bank practice is arguably much closer to the ECB strategy than the differences in labels and communication traditions suggest. All central banks analyse at a wide range of information, including monetary developments. All make some use of forecasting tools but at the same time devote great attention to the analysis of individual indicators. In no case are policy decisions driven exclusively by a single forecast number or any other unique indicator, such as a monetary target. The case of a strict exchange rate target is different, but not relevant in this context.

It is true, however, that in contrast to some recently fashionable approaches, the ECB's strategy does make a point in assigning an explicit "prominent" role to money. If money matters and inflation is a monetary phenomenon in the long run, no central bank can afford to leave aside the information contained in monetary and credit developments. At the same time, it is hard to find a satisfactory way to integrate money into traditional macro-economic analysis both at the theoretical level and at the practical level - e.g. in the context of standard macro-economic forecasting procedures. Moreover, one could also think of both pillars as representing different, yet complementary, views (or models) of the structure of the economy as well as relating to different horizons of analysis. Monetary policy needs to be robust to such fundamental "model uncertainty". For all these reasons it is most natural and, indeed, most transparent to organise economic analysis into two distinct pillars. Obviously, the information coming from the two pillars may not always point in the exactly the same direction and may indeed at times point in opposite directions. Indeed, under any strategy any pair of indicators may point in different directions and then require careful judgement and explanation. This kind of contradictory data is quite normal. The ECB's two-pillar strategy is open and honest about this. I regard this as a strength and not a weakness of our approach.

From what I have said so far, the ECB's monetary policy strategy can be characterised as a transparent description of how we set about our mandate of maintaining price stability. It has to take account of and contend with pervasive economic uncertainty, pluralist modes of analysis and diverse traditions of communication. As a consequence, while transparent, open and honest, the strategy is admittedly complex and flexible. For this reason it is not always likely to be perceived as being clear (at least initially) and not by everybody.

The nature of our strategy and the fact that the ECB is a new and supranational institution with diverse "multi-cultural" audiences places a premium on our communication policy. Again there is a need to balance transparency in the narrower sense as simply regarding the release of information with the requirement to communicate such information in clear, consistent and simple terms. Achieving clarity in communication is a difficult task even in the best of circumstances. It poses a particularly difficult challenge in the environment confronting the ECB.

In this respect, let me make two remarks up front. First, it takes two to communicate. Whether any given policy message or explanation is understood correctly depends both on the central bank and on its audience's ability and willingness to comprehend. Occasionally one gets the impression that some of our observers invest less time and effort in listening, reading and seeking to understand our pronouncements than - purposefully or not - picking out and presenting information in a way that fits best with one's own particular pre-conceptions. I was astonished to still find in the last annual report of an ECB watcher group a statement equating the ECB's monetary reference value to a monetary target and referring to it as the "second pillar". Now this is a case, to give just one example, of several mistakes occurring in just a single statement! The term "reference value" - not target - has been chosen for good reason and analysis under the first - not second - pillar cannot just be reduced to the reference value. Let me give our watchers the benefit of the doubt and assume that such sloppy use of language is due to simple oversight. If I may add: our watchers are perhaps lucky that they are not watched as closely as we are! It should be an instructive exercise for our watchers to examine the consistency of their arguments across - and even within - their own groups, within a single report, and also from one report to the next, with the same standard to which they hold the ECB.

This brings me to my second remark. Communication requires a common language. Now this already raises some particular issues to do with translation and the meaning of words in a multi-lingual context and, more generally, due to the diverse monetary policy and communication traditions that prevailed in the euro area. It is striking how the reporting in the media on the ECB continues to differ across countries and how often even identical information is interpreted very differently. Incidentally this problem seems to be faced by the ECB and its watchers alike. To give just one example, last year's OECD report led to the headline "OECD hits out at ECB lack of clarity" in the Financial Times, while titles in the German and French press emphasised OECD support for the ECB's strategy.

What does the ECB do to meet the communication challenges? The key instruments of the ECB's communication policy are the monthly press conference held by the President and the Vice-President and the Monthly Bulletin. I should not forget to stress that the various communication channels used by the ECB also fulfil a role in the discharge of the ECB's accountability vis-à-vis the European public and its elected representatives. As Mrs. Randzio-Plath will no doubt remind us, the more formal requirements for ECB accountability primarily relate to the Annual Report submitted to the European Parliament, the Commission and the Council of Ministers and the quarterly hearings held by the Committee on Economic and Monetary Affairs of the European Parliament. I should like to stress that the ECB has gone much beyond the Treaty requirements. It has adopted a pro-active approach to communication and transparency, which is suitable for the particular circumstances of the ECB's institutional environment. I think the ECB has no need to shy away from comparisons with practices adopted elsewhere by other leading central banks.

The introductory statement read out by the President at the beginning of the Monthly press conference held after the first Governing Council meeting of each month provides a comprehensive summary of the policy-relevant assessment of economic developments in line with the ECB's monetary policy strategy. This assessment is agreed by the Governing Council and thus contains the core message for communication with the media, the markets and the general public. Obviously there are limits on how much detail can and should be contained in a statement agreed by committee and released immediately after the Governing Council meeting.

Together with the extensive question and answer session, the opening statement provides a prompt and regular explanation of monetary policy decisions. Transcripts are swiftly made available on the ECB web-site. To our mind the press conference - in conjunction with the analysis contained in the Monthly Bulletin and together with the frequent public speeches of Members of the Governing Council - provides most of the relevant information that elsewhere is contained in official minutes usually published with considerable delay. Quite emphatically, the message we seek to convey is the consensus view of the Council rather than focusing attention on individual opinions. The latter approach we do not regard as conducive to clear communication and effective collective decision making, which is especially important in the context of a multi-country monetary union. Indeed, it is noteworthy that, in this year's reports, all of the ECB watcher groups represented here have come around to the view that the publication of voting records and attributed minutes would not be helpful in the case of the ECB.

Most of the recent criticism of our communication policy has indeed centred not on requests for more information but on complaints about confusing signals, i.e. concerning clarity rather than transparency in my earlier use of terms. Sometimes the same critics who earlier had clamoured for more information on individual opinions expressed within the Council were quick to point to the slightest nuances in speeches by Governing Council members as evidence of confusing communication. I agree that for the sake of clarity a "one-message", if not a "one-voice" policy would in principle be desirable. At the same time the Governing Council must communicate across the whole euro-area and even an identical message needs to be translated (not just literally) into different languages. Indeed, it is conceivably that a single message will sometimes have to be explained differently in different places and to different audiences in order to be understood in the same way. This also means that in the Eurosystem an important role for communication remains with national central banks.

The monthly press conference, including an extensive question and answer session, is probably the clearest expression of the ECB's proactive communication policy. Unprecedented among central banks this communication channel allows for a genuine dialogue and the opportunity to clarify mis-understandings instantly. In answering questions from journalists, the President, assisted by the Vice-President, in a way acts as an "intermediary" in further explaining the Governing Council's assessment and giving it his authoritative "single voice" interpretation. This provides additional "on-the-spot" help to journalists and, indirectly the wider public, in understanding the thinking of the Governing Council and, importantly, in becoming familiar with the language in which that thinking is expressed. The interactive interpreting function of the Press Conference should contribute to speedy learning and correction of mis-communication on both sides. As always when learning a new language, also in the case of monetary policy strategy, a lot of repetition will need to be involved. At the same time the language will sometimes evolve - in such an interactive setting - in an unintended and unpredictable manner. The episode of the "creeping bias" last summer, where the term "bias" was put into the President's mouth by a journalist, is a vivid illustration of this.

In my view, our watchers in the euro-area will have to learn to live with a situation where a single message will be expressed in slightly different words. Slight nuances in the delivery of messages should not be confounded with differences in substance. The Council comes to a common assessment, which is reflected in the Introductory Remarks, in the press conference, in the subsequent Monthly Bulletin and in the speeches and remarks delivered by Council members in the inter-meeting period. Observers are wrong to believe that the basic message could differ in any substantial way across different communication channels (say from the press conference to the editorial of the Monthly Bulletin, or between different Council Members speeches).

To my mind, the ECB's approach to monetary policy and to communication is open and honest. We expect our critics likewise to be open and fair. The ECB is willing to listen and learn. The ECB carries a heavy responsibility to fulfil its mandate and the trust placed upon it. To do this most successfully it must make itself understood. It also must be listened to. Communication is a two-way process. I look forward to your remarks.