Journal of Economic Dynamics & Control 49 (2014) 7073

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Journal of Economic Dynamics & Control

journal homepage: www.elsevier.com/locate/jedc

Communication and transparency The example of the ECB

Otmar Issing
Center for Financial Studies, Goethe University Frankfurt, Grueneburgplatz 1, 60323 Frankfurt, Germany

a r t i c l e in f o

abstract

Article history:
Received 7 August 2014
Accepted 26 August 2014
Available online 16 September 2014

Communication by central banks has two goals to fulfill: One is to be accountable and
transparent to the public for its policy. The other is to make monetary policy by guiding
expectations as effective as possible. Diversity of views inside the bank is instrumental for
appropriate monetary policy decisions, but creates a tremendous challenge for communication. Central banks dispose of a variety of communication tools. Forward guidance
seen as a revolution in central banks' communication raises new questions. Not
maximum, but optimal transparency should be the final stage to strive for.
& 2014 Elsevier B.V. All rights reserved.

Keywords:
Central banking
Communication
Transparency

1. Introduction
Preliminary remark
I would like to thank the organizers for having invited me to this fascinating conference. I admire John Taylor for his
outstanding research. But, on top of that I will remain grateful that he accepted my invitation and came to Frankfurt to the
ECB before the start of the euro to discuss problems of monetary policy for a new currency, the euro.
Andy Levin has presented a stimulating paper. The key message is that the monetary policy strategy and communication
should be a joint design. I could not agree more. The challenge is to reconcile two time dimensions of steering expectations.
One is short-term indications about policy intentions in the next meeting(s) of the policy-making body. The other is to make
the sequence of individual decisions consistent over time with the strategy and the mandate of the central bank. If this
challenge is met, monetary policy is predictable in the short-term and credible in the longer-term.
Communication has two goals to fulfill. One is the obligation to be accountable to the public for its policy. In this sense,
accountability is the counterpart of independence of the central bank. The other goal is to make monetary policy as effective
as possible. Monetary policy can only fix the central bank interest rate(s) thereby controlling the very short end of the
interest rate spectrum. The influence of the central bank on the long end depends on market expectations regarding future
central bank decisions (and their impact on inflation etc.). Woodford (2005) goes so far to say that very little else other than
expectations matters.
Whereas for a long time central banking was surrounded by a peculiar and protective political mystique and presented
as an esoteric art (Brunner, 1981), transparency has become a kind of mantra for central banks.
Following Andy's presentation I will discuss a few issues of the complex subject communication and transparency.

E-mail address: issing@ifk-cfs.de

http://dx.doi.org/10.1016/j.jedc.2014.08.023
0165-1889/& 2014 Elsevier B.V. All rights reserved.

O. Issing / Journal of Economic Dynamics & Control 49 (2014) 7073

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2. Diversity of views
There is a vast literature concluding that committees are superior to a one person statute to assess the situation
properly and take the appropriate monetary policy decisions. This result is based on the reasoning that a diversity of views is
conducive to cover different aspects and weighing them against each other before taking decisions. Competition of views
within the central bank among staff and board members is requested to achieve the best policy (Svensson, 2013). As
member of the Executive Board of the ECB in charge of economics and research I regularly organized informal discussions
especially with academic critics of our strategy and policy as a fundamental element in this process.
However, diversity causes a tremendous problem for communication. Should the central bank make all the different
views transparent? Should all members of the decision making body present their views to the public? Would this not end
in a cacophony, a disaster for communication undermining the credibility of the central bank?
At the ECB on monetary policy decisions we followed the consensus principle (Issing, 2008). This was often misunderstood as a procedure by which the decision was delayed until the last member agreed. The reality was very different.
Consensus must not be misunderstood as unanimity. Consensus as it was practiced by the Governing Council means no
more and no less than that at the end of an extensive discussion in which every member could express his or her view and
policy preferences, the president could announce the decision. Consensus also means that one or more members who at the
time might have preferred a different decision are able to live with the consensus that is, acknowledge the power of the
argument in favor of the decision. This is essential when it comes to communication and general support of the decision. In
a multi-national environment as the euro area it is crucial that the ECB's decision is explained and defended by all members
of the council at home to avoid any suspicion of national bias. It is obvious that this is easier achieved when nobody is
regarded as being defeated in a voting. Insofar the consensus principle could be seen as a means to reconcile internal
diversity of views with the need to communicate monetary policy decisions in a clear and convincing manner.
Diversity is not only an issue inside the central bank but also on the side of the receivers of the central bank's
communication. Here, the central bank has to deal with a diverse world of audiences (Issing, 2005). Academics mistakenly
often see the monetary policy process as a kind of seminar and expect corresponding research based communication.
Beyond this specific group there exists a complex world reaching from bank economists to journalists and the general
public. Experience has shown how difficult it is to communicate all information relevant to the decision making process in a
way that is not only exhaustive but also clear and comprehensible. Psychological research has pointed to the limits of human
information processing skills (Kahneman, 2003). This research has shown, e.g. that the weighing of information greatly
depends on its intuitive accessibility. Furthermore it is generally simplified and categorized before it is collated. Altogether
this implies a huge challenge for central bank communication. A too sophisticated approach could easily create confusion
rather than providing clarity.
3. Communication tools
For us in the ECB, the youngest central bank in the world, responsible for the stability of the euro, a totally new currency
for a large group of countries, it was obvious that good communication was an indispensable condition for success. Already
in October 1998, less than 3 months before the start of monetary union, we informed the public about our monetary policy
strategy and explained that maintaining price stability as our mandate we would keep the inflation rate below two percent
over the medium-term. (At an early stage we also published a book with detailed background research, see Issing et al.
(2001)).
From the start of the euro in January 1999 the ECB used a broad spectrum of communication tools: The press conference
of the president and vice president after every monetary policy decision meeting beginning with an Introductory Statement
followed by questions and answers; a week or so later the Monthly Bulletin provided encompassing information on the
economic and financial background for the decision taken.
After a period of gaining experience the ECB decided to publish the projections of the staff four times a year. In the
remaining eight editions of the Monthly Bulletin (mostly) two articles are devoted to research on key aspects of monetary
policy and the economy in general. A number of special reports as e.g. the Financial Stability Review are also published
regularly. The research oriented Working Paper series in quality and numbers have soon become a tremendous success.
Occasional Papers present analysis on relevant topics.
The members of the Executive Board and the governors of the national central banks give speeches all over the place. The
accountability towards the European Parliament is mainly the task of the president.
The ECB has also established a special relation with academia, bank economists and the media. Three watchers groups
were formed even before European Monetary Union started. In 1999 as a reaction to critical reports the ECB started a
conference in cooperation with the Center for Financial Studies at Frankfurt Goethe University and with all watchers
involved. This conference since has taken place every year and the list of participants reads like a roll call of eminent names
from academia, banking and the media. The interaction with leading representatives of the ECB has developed as a special
communication tool involving directly the main multipliers on issues of central banking. The conference has contributed
to a better understanding of the ECB's policy and at the same time has also stimulated research.
It is difficult to measure the effectiveness of communication. In guiding inflation expectations, probably the most
important challenge the ECB does not stand behind other major central banks. Despite of this anything but self-evident

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O. Issing / Journal of Economic Dynamics & Control 49 (2014) 7073

success for a new central bank being responsible for a very special and complex monetary area, the ECB was criticized from
the beginning for a lack of transparency (see e.g. Buiter (1999); for a riposte (Issing, 1999)).
This is insofar strange as the ECB from the beginning compare it with the longstanding practice of the Fed
communicated its monetary policy decisions immediately after the council meeting and explained the reasoning behind
virtually in real time. Early on I realized that we made a mistake in calling the Introductory Statement not minutes. The
term minutes gives the impression that reading it is (almost) the same as having attended the meeting oneself. However,
minutes published by central banks are far from that. This can be best judged from the fact that when the FOMC at its
meeting on 27/28 January 2004 discussed whether the time lag before publication of the minutes should be reduced from
six weeks to three (which was in fact done) the following objections were raised: Some members raised concern, however,
that accelerated release of the minutes might have the potential to feedback adversely on the deliberations of the
Committee and on the minutes themselves. The members also emphasized the importance of allowing sufficient time for
them to review and comment on the minutes and for reconciling differences of opinion among the members of a large and
geographically dispersed committee (see minutes of that meeting).
So much as to the authenticity of minutes. So what could be expected from extending their length? I could not agree
more with the following statement in Andy Levin's paper: But the reality is 3060 min of questions and answers can
provide a much more comprehensive explanation than a few hundred words in a written statement.
One issue remains contentious. The ECB so far has declined to publish votes. On the one hand this is the consequence of
following the consensus principle. The other, more fundamental reason is concern that publishing votes and names would
unavoidably trigger speculations about any national bias of members of the Governing Council. (And it is a safe bet that
publishing votes without attributing names would be an unsustainable approach.)

4. Forward guidance
Forward guidance is the so far last step in a long and still ongoing process of central bank communication. Yellen (2012)
sees forward guidance as a revolution, marking a large leap forward in the previously steady evolution of central bank
communication. Discussing the pros and cons of forward guidance in detail would go far beyond this short paper (for a more
comprehensive analysis, see Issing (2014)). So what follows are a few observations.
The intention of forward guidance is to reduce uncertainty of the public about future monetary policy especially in the
situation of central bank interest rates hitting the zero bound. However, forward guidance risks giving the impression that
the central bank can overcome the uncertainty to which the central bank itself is exposed exogenous shocks and data
unreliability, to name only two sources of uncertainty. There are diverse forms of forward guidance (ECB, 2014). If the signal
on future policy decisions is vague, but still called forward guidance, the value of information is meager and will trigger calls
for more. If the signal is strong, coming close to a kind of unconditional commitment, the central bank is confronted with
an unpleasant choice in case of new data or a new assessment of the situation. In this case either the central bank sticks to
the communication on which financial agents have based their investment decisions, or it revises its communication,
thereby causing immediate losses for investors. In the first case, the need for the central bank to change course increases
over time; in the second case, forward guidance will immediately lose credibility.

5. Maximal transparency?
Communication of the central bank is intended to create transparency, transparency in first place on its monetary policy.
In the long process of extending and improving communication, transparency has substantially been enhanced over time. Is
there a limit to this? Many contributions to this question seem to start from the notion of maximum transparency as the
final goal. Society demands transparency from public institutions. For an independent central bank, this requirement is even
more pressing. Any selection of information, any retention of knowledge could be seen as a violation of the principle of
transparency.
From this perspective, absolute transparency seems to be a necessary counterpart of independence, almost an end in
itself. Yet, demand for more information is almost unlimited. The requests from agents in financial markets (and the media)
are insatiable. Yet, maximum transparency is a mirage, it is theoretically a nirvana approach and practically impossible to
achieve.
Central banks communicate a lot of information, information of very different content and quality. If the information is
too noisy, too uncertain, and if the risk is high that the public might be distracted, it might be better to restrict
communication. It is, for example, a huge challenge to publish the forecasts of a central bank and the underlying uncertainty
such that it can be properly understood and assessed by the public.
Not maximum, but rather some kind of optimum of transparency should be the final stage to strive for. The development
of forward guidance e.g. must be seen as a dynamic process which is anything but fully controlled by the central banks.
It will be hard, if not impossible, to go back and reduce communication from what has been practiced so far.
Communication will remain a tremendous challenge for central banks.

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References
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Buiter, Wilhelm H., 1999. Alice in Euroland. CEPR Policy Paper No. 1, April.
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Issing, Otmar, 1999. The Eurosystem: Transparent and Accountable, or Willem in Euroland. CEPR Policy Paper No. 2, April.
Issing, Otmar, 2005. Communication, Transparency, Accountability: Monetary Policy in the Twenty-First Century. Federal Reserve Bank of St. Louis, Review,
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Issing, Otmar, 2008. The Birth of the Euro, Cambridge.
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