Inflation Targeting and Communication

Economics works through more or less sophisticated instruments. Communication is one of them, ensuring a large possibility for manipulations and predictability, but somehow uncertain results. Ideally: an economist communicates to people things in a convincing manner; they believe him, the communicated “things” become true because everybody believe it, and the economist is declared to be genial simply by reaching the target point through manipulating the public opinion. This “formula” started to be implemented by many countries, and mainly in the monetary policy related to inflation targeting which insistently works with communication tools. The most interesting and complicated part of it is that policymakers have to change the amount (value) of the money in your personal pocket without getting into it, without directly stealing or adding – just by telling you how much money you will have in one year or two. Believe them or not.

When predicting the inflation target level, communication becomes the crucial to reach it by making people to interpret it as their own expectation. Obviously the central banks inflation reports are the initial source from which the information is being transported to the public (usually through mass-media). Thus, it is important to note that the quality of these reports stands for a comprehensible target and ad-hoc explained potential “surprises”, representing an earlier justification in case the target will not be reached.

Some more sophisticated theoretical rules which guide the public on how to react and interpret central banks actions are presented under the following methodologies: forward-looking policy rule, implied forecast update and plowing the verbal assessments. All of them imply relatively simple and observable (sometimes given) variables (inflation forecast, time period, interest rate (etc.), and some coefficients which denote the influence of the observed variables on the real inflation level). Following the “unwritten” rules of expectations and observing what happens in the reality, people get to one of the three possible conclusions:

  1. They believe the predictions; no surprises expected. The chances that the predicted inflation will be reached in this case is high, as people themselves ensure the completeness of this task;
  2. They do expect some surprises and don’t trust to forecasted inflation level. In this case, if people believe that there will be a higher inflation, they will excite a higher one;
  3. They just get confused. I assume that this is the most inconvenient position, as the inflation gets uncontrolled under such conditions and the final level just cannot be manipulated.

Obviously, there is no country which stands out as an exceptional communicator, always some surprises may interfere; still no country comes out as an overall bad communicator. If that would happen, I may think that central bank is an incompetent predictor, which is by assumption (and good manner) not correct. Consequently, we cannot say that central banks are bad predictors; we neither can say that they are good. Furthermore, the conclusions of some empirical findings of the paper “Inflation Targeting and Communication: Should the Public Read Inflation Reports or Tea Leaves?” by Bulif, Smidkova, Kotlan and Navratil state that about 1/7th of all monetary policies on the observed countries are confusing and inflation factors are contradictory. About 1/3rd of monetary policies incorporate some unexpected surprises, and finally the monetary policy transparency is assumed to not be necessary beneficial. It remains only to think whether we really do or not need the inflation targeting and implication of communication tools if no perfect match is reached?

Taking the situation from the other way around: the reasons of all targets deviations from the reality are the unexpected events, those which cannot be exactly predicted and which make the economy to be volatile and… real. My opinion in this respect is that even if inflation targeting can’t reach 100% successful rate through communication tools, it is still important to continue working on it. If central banks would abandon the inflation targeting, they would become simple observers of the “monetary events” and would interfere only when there will be distinguishable distortions. Thus, inflation targeting offers to central banks the chance to interfere before the “gap” and preventing it, using the unconscious of the people: in a sense, people help themselves to ensuring the protection of their own money. Furthermore, central banks have the incentive to be more dynamic in controlling the inflation (making the real one to correspond to the one predicted) as this influences its credibility, reputation and professionalism.

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3 comments

  1. Vitalie Ciubotaru · · Reply

    1. What is inflation targeting? How do central banks choose their monetary policy regime?
    2. What is a “good” prediction? How do central banks — or whoever else in this respect — assert the efficiency of their policy?

    P.S.: 🙂

    Like

    1. Natalia Bejan · · Reply

      I do not really understand whether you expect me to answer these questions or you just can’t find some of this info on google? 😉

      Like

      1. Vitalie Ciubotaru · ·

        Well… I was expecting a bit different reaction. Sorry.

        Like

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