The soundless tweets of central banks
Central banks tweet a lot, but they come across as mute. Translation: communication techniques are improving, but the information being communicated has left something to be desired for some time. Using a Shakespearean metaphor, in a time when sunlight-loving larks would be needed, central bankers seem to have turned into nightingales, which sing tirelessly, but love the darkness of the night: they communicate more, but inform less.
Our starting point is the research carried out with Oana Peia (University College, Dublin) and Davide Romelli (Trinity College, Dublin) on how central banks communicate using on the X social media platform (Twitter before the summer of 2023). Analyzing the communication policies of the central banks of G20 countries, it emerges that X is the most followed social media for the vast majority of central banks. The exceptions are the central banks of Australia, France, Italy and South Africa, which are relatively more followed on Linkedin, and that of South Korea, which is instead more followed on Facebook. Until last September, the analyzed posts on X (formerly known as tweets) totaled over 215,000, with the central bank of Indonesia being the most active of all. How effective were these posts? If an indicator of effectiveness is the frequency with which initial posts were reposted, the central banks that record the highest retweet rates of their original posts are the central banks of Saudi Arabia and Japan, followed by the Fed and the ECB .
But what are their posts about? The topics that attract relatively more attention can be grouped into two categories: payments system and monetary policy. If the payments system essentially means communications on banknotes and coins, communication monetary policy goes to the heart of a central bank’s activity, i.e. information on decisions about interest rates and liquidity.
By now everyone has learnt that the effectiveness of monetary policy depends on its ability to influence expectations. The obligatory reference here is Ben Bernanke, former governor of the Federal Reserve, and now also - very surprisingly - Nobel Prize winner, for whom monetary policy is 98% words today, i.e. announcements. Monetary policy announcements, if credible, increase the probability that the expectations of families, businesses and markets will go in the direction that is desirable for macroeconomic stability. Monetary policy announcements were the great innovation that central banks introduced into monetary policy when, starting from 2008, so-called extraordinary times began, that is, when the succession of financial crisis, the sovereign debt crisis and pandemic recession had to be faced. Monetary announcements work as a tool to drive the real macroeconomic engine - expectations – but only if the central bank is transparent and credible: it is called the Ulysses effect, precisely recalling the Homeric hero who convinces his men to tie him to the mast. Monetary policy announcement theory has progressively become increasingly robust and established, and empirical evidence continues to accumulate, always confirming the link between central bank announcements and policy effectiveness.
Let's take the results published by the Bank for International Settlements (BIS). BIS researchers have analyzed announcements from four different central banks: the Federal Reserve, and the monetary authorities of Norway, New Zealand and Sweden. The common feature of the central banks analyzed is the publication of projections on future interest rates, even if in the case of the Fed these projections do not have an official nature. The announcements were assessed first and foremost on the basis of their predictability: in general terms, and in normal times, a central bank must have transparent and therefore predictable behavior. The average result is that there is alignment between central bank announcements and financial markets, and for Norway this reaches 75% predictability. But a central bank that is predictable in normal times must be credible when it makes surprise choices, i.e. unanticipated by the markets; in those cases, credibility is measured by how much the markets adjust their behavior as a consequence of the surprise move. Credibility also seems to be there, although market adjustments fluctuate between 5% and 30%. In short: once again, empirical evidence shows that the lack of clarity for central banks like the Fed and the ECB is not justifiable.
But since when central banks have become voiceless? The politics of announcements had been a cornerstone of monetary navigation: the ECB and the Fed had become compasses for the private economy. The horrible year was 2022. First there was a systematic forecasting error, which dragged on for a year and a half: an inflation which was described as temporary, turned out not be that at all, in terms of timing and methods. Then there was a change of course, in which monetary announcements have disappeared, and decisions have been made piecemeal, "meeting by meeting" and "on the data available at that time". End of transparency. The private economy no longer has a compass: it must interpret signs and omens, with the potentially beneficial Ulysses effect being replaced by the toxic Delphi effect, and interpretation often means misinterpretation. Central bank governors have made a choice that is harmful to the economy, but opportunistically advantageous in personal terms: after having systematically erred in communication, they have chosen silence as the remedy. ECB and Fed have turned from compasses into floaters; they no longer guide expectations, but adapt to the tide.
And if this wasn’t enough, adding to uncertainty there is the fact that institutional silence is covered by the clamor of peacocks, central bankers who surreptitiously put their voice in place of the institutional one, possibly violating the rules on the information embargo, and of crows, central bankers who use anonymity to destabilize collective decisions. If we add to this the physiological diversity of views on the conduct of monetary policy - the hawks and the doves - the confusion in the aviary becomes a pandemonium.
In conclusion: improving communication while worsening information makes central banks look like Leda's swan: beautiful in appearance, but who is inside needs to be discovered.
