Central bankers were once the silent type. Now the age of the quiet, opaque central banker may be behind us. Part of this pivot was certainly due to the great recession. Central bankers felt it necessary to update and inform the public about what it was doing and what was happening.
This is a good thing. Transparency is a positive. But there is more to the jawboning than simply being more open to the public. It is about the central bank weaving the economic story it wants to maintain.
Economists have only recently begun to explore the power of narratives in economic outcomes. In a discussion paper earlier this year, Robert Shiller made an appeal for economists to take economic “narratives” more seriously. For Shiller, popular narratives can have more of a driving influence on economic outcomes than economists are typically willing to admit.
As an example of the power of such stories, Shiller examines the recession of 1921 that followed the end of World War I. He says that it was, in part, driven (and made worse) by the narrative. The typical explanation of why it occurred is that a central banker went on a long vacation.
But Shiller lays out other stories that were common at the time. One of the more interesting surrounded the potential for “peak oil.” Oil prices had spiked by 50%. The automobile had begun to catch on.
Another was the widespread belief that deflation was coming. Because consumers believed that prices would fall, they held back from making purchases. This was the era of the “profiteer.” That is the word used to describe businesses engaged in the practice of price gouging. Thrift became a virtue. There were calls to avoid buying anything other than the essentials. Consumer spending fell hard and fast. Shiller sees this as a “consumer boycott” led by a narrative, not by a traditional business cycle.
Some see the recession of 1921 as simply a novel slice of history. But there is applicability to the present as well. Partly, the term “Great Recession” itself leads to a narrative. Other potential takes include the “secular stagnation” hypothesis, “lower for longer” interest rates, and “the new normal” economy. All are catchy, sometimes easy-to-understand ways of describing the US economy.
This is why the rise in direct, clear central bank disclosures is likely only just beginning. In fact, there have never been more speeches given by representatives of central banks than today. In a recent speech, the Bank of England’s Chief Economist Andrew Haldane called for clearer communication of monetary policy. This would increase transparency and trust with the public. And it would describe their actions and intentions to markets.
Being clear about the goals and sought-after outcomes is known as the “forward guidance” policy tool. The purpose is to build trust and use that trust to produce specific outcomes. In other words, the central bank is constructing an economic narrative of its own to avoid having to unwind or contest the reports of others.
But it is not easy for modern central bankers to do this well. Constructing a narrative in general is not a simple task. And it is made more complex by the number of voices and opinions coming from institutions.
Especially for an institution like the Federal Reserve. There is a wide range of opinions and a large number of people making claims. This makes a single, coherent tale difficult to weave.
Even more basic than the lack of a singular voice is the lack of understanding. Monetary policy is complex. A well-stated thesis of interest rates being “lower for longer” can be understood by a wide audience. But explaining the mechanics and purpose of quantitative easing is far from simple. This makes it difficult to explain monetary policy to the broader public. And it is also hard for an institution of the Fed’s ilk to maintain a given narrative.
It goes without saying that the Fed (or other central banks) may wish to control the economic narrative. But it may not be capable of doing so. Shiller points out that narratives have a life of their own. It is impossible to predict which will go viral. From this perspective, it makes sense to speak often. This improves the chances of going viral.
Should the Fed and other central bankers try to build and control economic reports? Certainly. But they may not be capable of doing so. Bringing the message to a broader audience requires an unfamiliar skill set. It also requires patience. It is a worthwhile endeavor. But it will take time to implement.
For those watching the economy, this should be a call to decode popular narratives to understand their potential economic results. It is certainly not simple. But it may be more and more important in a world where questionable news sources can shape popular opinion. Further, it points to the potential effects of shifts in the efficacy of forward guidance from central banks.
As the narratives shift or break down, so might the economy. It is a brave new world for economics.