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.