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Communications Challenges for Multi‐Tasking Central Banks: Evidence, Implications

International Finance

Published online on

Abstract

The communications challenges facing central banks that share macroprudential responsibilities with other agencies are daunting. Central bank surveys and an index of central bank transparency reveal that central banks have adopted the necessary institutional arrangements to communicate effectively a price stability objective. However, their communications strategy is ill suited to dealing with financial stability issues. Recent events require a departure from the pre‐crisis narrative that entailed a predictable relationship between inflation and output gaps, of which financial stability was considered a by‐product. I argue that central banks should adopt a hybrid form of inflation and price level targeting as well as require that macroprudential regulators jointly communicate their determination to act in concert, especially when the financial system is under stress. The current practice of announcing the rationale for the setting of monetary policy instruments is no longer an effective communication strategy when central banks must also evince a concern for financial stability.