Bank of Japan IMES Special Trialogue (Part 3)

The Institute for Monetary and Economic Studies (IMES) at the Bank of Japan, to mark its 40^th anniversary, recorded three conversations in October 2022 on central banks, research, and monetary policy in which I participated, together with Athanasios Orphanides (my fellow Honorary Adviser to the IMES) and Deputy Governor Masazumi Watakabe. The third of these conversations, focusing on “An important role of central bank economists for communication”  is now available at https://www.imes.boj.or.jp/en/newsletter/nl202302E1_s3_r.html#t00.

Deputy Governor Watakabe opened the conversation by asking “In what ways do you think central bank research is relevant to or useful for communication purposes?” This is, of course, a key question and goes to the heart of why central banks have research departments.

Athanasios emphasized that a central bank needs to “explain what it is doing and why it is operating in a specific way. But to effectively respond to these public debates, it's very important to have central bank economists who understand academic research and translate that into the language that is understood by the community.”

In my response, I agreed and noted the importance of inflation targeting in facilitating clear communications of policy making by providing an explicit focus, the central bank's inflation objective, around which policy actions can be explained. But I also stressed the importance of not overselling what monetary policy can achieve.

The conversation turned to how central bank economists, through research on their own countries, can help distill and share lessons that as, Athanasios put it, “help identify best practices and build the global regulatory framework.” I noted in this context the important early work on the effective lower bound (ELB) on policy rates by Japanese economists which subsequently became relevant for a much broader set of countries after the global financial crisis. The experiences with attempting to manage expectations at the ELB and, more recently, with increased rates of rates of inflation, even in Japan, have focused attention on the need to better understand inflation expectations. This is an area where research by IMES economists using survey date from, for example, the Tankan survey of several thousand private firms conducted by the Bank of Japan, are making contributions to an important topic of interest to both central bank and academic researchers.

Athanasios highlighted the impact of demographics on economic growth as another area in which Japan is at the forefront. He suggested that, as was the case with the ELB, research that draws lessons from the Japanese experience is likely to be of increasing relevance to many other countries.

Policymakers at central banks face many challenges in  implementing successful monetary policy . A strong research staff can help policymakers in meeting these challenges by offering new insights into the effects of monetary and regulatory policies, distilling the latest advances from researchers around the world, and accessing how best to communicate policy actions to the public.

Bank of Japan IMES Special Trialogue (Part 2)

 

The Institute for Monetary and Economic Studies (IMES) at the Bank of Japan recorded three conversations on central banks, research, and monetary policy in which I participated, together with Athanasios Orphanides (my fellow Honorary Adviser to the IMES) and Deputy Governor Masazumi Watakabe. 

On February 27th, I posted a link to the first of the three conversations which covered "Interactions between Central Banks and the Academic Community." The second of the three discussions, which focused on "Art and Science in the Conduct of Monetary Policy" is now available at https://www.imes.boj.or.jp/en/newsletter/nl202302E1_s2_r.html

In this conversation, I stressed that "...monetary policymaking must be based on firm science, but in the application, it's not a cookbook process where you just follow the directions..." The global financial crisis, COVID, and the war in Ukraine are examples of situations in which central banks found themselves facing new and unexpected challenges, and I concluded that "The implications of all those things are uncertain at the time and there is no model that would tell you exactly what you should do. In such cases, you need good people with good judgement."

Athanasios pointed out that, while I had started out by talking about science, I ended up by emphasizing judgement. He went on to argue that "...good public policy must be based on solid analytical foundations and measurement." He concluded that "...judgement is required in the situation when there is not enough data nor information to give clear evidence. In that situation, the policymaker by necessity must combine available pieces of information with his or her personal experience and knowledge and come to a good conclusion."

Dealing with uncertainty requires judgement. Deputy Governor Watakabe suggested an "...analogy is between science and technology, rather than between art and science." He noted that just as engineers have to design systems that are robust in the face of uncertainty, economists at central banks must do the same. "Central bank economists are expected to be good engineers." 

From there, our conversation moved on to discuss the role of expectations and the types of data central banks need as they seek to understand the economy and design policies. 

The third conversation in the trialogue deals with "The Role of Central Bank Research in Communications" and will be featured in a future post.