Tuesday , October 24 2017
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Agreeing a central bank communication strategy

Summary:
In conversation at MMF yesterday, a few of us were discussing what it would take to tip the MPC or similar into deliberating on, voting on, and publishing interest rate plans?  With their frequent yield-curve-talking, MPC are heading towards this point [a point which their FPC colleagues already seem to have reached] but they are not there yet.  A thought experiment is to imagine the appointment of a hypothetical advocate of publishing said plans. Let’s call this person Pupa, short for for PUblished Plan Advocate.  The existing majority view is of course that the status quo is fine.  In other words: -that plans should not be published -and it is sufficient to vote on current interest rates only, and to arrive at that vote by studying inflation forecasts conditioned on the assumption

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In conversation at MMF yesterday, a few of us were discussing what it would take to tip the MPC or similar into deliberating on, voting on, and publishing interest rate plans?  With their frequent yield-curve-talking, MPC are heading towards this point [a point which their FPC colleagues already seem to have reached] but they are not there yet.  A thought experiment is to imagine the appointment of a hypothetical advocate of publishing said plans.

Let’s call this person Pupa, short for for PUblished Plan Advocate.  The existing majority view is of course that the status quo is fine.  In other words:

-that plans should not be published

-and it is sufficient to vote on current interest rates only, and to arrive at that vote by studying inflation forecasts conditioned on the assumption that interest rates follow the path estimated to be expected by markets over a 10 day average.

-and to desist from making reference to optimal policy or policy rule analysis in deciding on the vote, certainly in public, and perhaps even in private too.

-and to desist from making the forecasts replicable by supplying working version of the model codes, databases, and forecast judgements.

Pupa arrives in post.  One thought experiment is that she implements her own communication strategy, consistent with how she thinks the MPC as a whole should do it.  How do the rest of the rest of the MPC respond?

Some aspects of the implementation simply steamroller the other MPC members:  once the model, strategy analysis, and forecast judgements are disclosed, they are out there, against the wishes of the others.  Others make life very difficult.  With an interest rate plan out in the open, others will face direct questions about what their plans are relative to the one that is out there.  The yield curve against which others used to base their hints will, depending on where Pupa sits in the collective about the state of the economy may well be tainted by Pupa’s views.  If Pupa’s vote and plan are connected to policy rules and loss functions, others will be asked pointedly how they are arriving at their votes, and what they think of those rules and loss functions.[‘Q:  do you look at these rules too?  A:  Not telling you.  Q:  do your votes result from a plan?  A:  Not telling…..’]

To execute her own strategy, she has to commission monetary strategy analysis to allow her to arrive at her interest rate plan.  She has sole control over two MPC unit economists’ time, and access to all model codes and data, so, in principle, could eventually develop the capability to do this.  She could commission the central staff to do the analysis for her, but there are many calls on that time.  Would the other MPC members use their block vote to stop her devoting staff resources to these tasks?

One option would be for Pupa to execute the analysis behind interest rate planning [leave aside resourcing difficulties] but simply to submit and disclose just the current vote.  But as a known advocate for model/forecast/loss-function/interest rate plan transparency, would such a position be sustainable?

Imagine the first Q and A after a speech:  ‘you have explained how you think voting is incoherent in the absence of a plan, and that this plan and how you arrived at it should be disclosed.  Yet you seem to have simply voted on current rates like the others.  How do you justify that?  Are you not doing your job properly?  A:  I did the analysis and voted on current rates only, in the knowledge of what my plan was.  Q:  what was it?  A:  I’m not telling you.  Q:  will we find out in the minutes?  A:  No.  Q:  Why not?  A:  Er, because we decided to have that discussion outside the minuted meeting, so that it would not be minuted, and I could justify not telling you…..’

The question raised by thinking through this hypothetical is to what extent MPC members are team players, and to what extent they are individuals.  In order to function, all members have to agree to certain ways of doing things.  For example, they have to agree to attend a meeting if one is called.  Since resources are finite, they are likely to have to agree on compromises about what avenues are pursued and what are not.  Does the team-playing role extend to Pupa agreeing to forgo declaring interest rate plans?  Is such abstinence even tenable were Pupa to be appointed?  If this were in question, would that make it less likely that Pupa were appointed in the first place?  Should it make it less likely?

One way out of this issue – how MPC members should arrive at and enforce a collective communication strategy – would be for the Treasury to impose a communication strategy on the Bank.  It is arguable whether this would constitute a trespassing on operational independence.  It is a trespassing that has already taken place to some extent, with HMT commissioning the Bank to review the practice of forward guidance in 2013 around the time of Carney’s arrival.  And one that could be justified by pointing out that notwithstanding the literature about the possible downside of too much communication, more transparency helps the process of holding the institution to account.  HMT in so instructing might point out that any satisfactory vote must result from a plan;  so one is simply arguing that those plans should be disclosed at some point if only to assess whether the appointees were doing their jobs well or not.

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