RDP 2021-05: Central Bank Communication: One Size Does Not Fit All 2. What is Effective Central Bank Communication?

As mentioned in the above, we investigate 3 main aspects, or qualities, of central bank communication: the ease of reading and the degree of reasoning as assessed by different audiences. We discuss the reasons for our choice of these particular lenses in more detail here, along with a brief discussion of the existing literature.

Questions about readability and audience are natural ones when thinking about communication and there is a large literature on these topics. For example, the much-used FK grade level (Kincaid et al 1975)^[2] embodies the concepts of readability and audience to the extent that it highlights how certain texts are more or less appropriate for different audiences based on their level of education.^[3] The topic of reasoning is also common in the central banking literature, although it is not labelled as such. In particular, the literature on central bank transparency argues that not only does central bank communication have to be understood; it needs to reveal a central bank's analysis, reasoning and thinking. For the purposes of this paper, we label this concept ‘reasoning’. That is, we see transparency as combining the concepts of readability and reasoning. Finally, while issues of readability and reasoning are common in the central bank literature, there is surprisingly little explicitly on the topic of audiences; much of the literature implicitly approaches these issues from either the perspective of a trained economist or assumes that simpler communication is universally better. We discuss some relevant literature on these 3 topics in more detail below.

2.1 Readability

As implied above, there is a degree of fuzziness in the central banking literature. Some papers implicitly equate readability with transparency, while others treat the existence of information on policy objectives as there being transparency about the objectives. We would suggest that the existence of information is an example of providing the reasons while the manner of its expression is an example of readability – which could be either clear or incomprehensible.

Notwithstanding the fuzziness in the literature, there are a number of papers that explicitly consider readability (e.g. Haldane 2017). Among these studies, simple readability formulae, most notably the FK grade level, are commonly used. The principle of the FK grade level, and alternatives are very similar, is that longer sentences or words with many syllables make a paragraph more difficult to read and comprehend. While many researchers (Jansen 2011; Bulíř, Čihák and Jansen 2012; Luangaram and Wongwachara 2017) adopted this metric for its simplicity and objectivity, others (Redish 2000; Janan and Wray 2012) criticise it for its ignorance of communication content, of common stylistic elements and of format and text structure. Those elements are commonly considered more important to comprehension than the number of syllables in a word or the word count in a sentence (Janan and Wray 2012).

Importantly, easy reading is not an end in itself. More readable communications should lead to a better understanding of monetary policy decisions and less market shocks. Reflecting this ultimate objective, Fracasso, Genberg and Wyplosz (2003) investigated 19 central banks and found that more readable central bank monetary reports are indeed associated with smaller policy surprises. Similarly, Jansen (2011) and Davis and Wynne (2016) found that more readable central bank communication helped to reduce financial market volatility. So, despite debate about the most appropriate measures of readability, it seems that some central banks have managed to develop more effective communication practices – at least as measured by financial market volatility. But, the fact that readability and financial market volatility still varies across central banks and countries suggests that this is not a simple task. In part, this is because communication quality depends on more than just readability.

2.2 Reasoning

Effective communication also depends on conveying meaningful and useful information.^[4] For independent central banks, accountability relies on a central bank being transparent about why it thinks what it does. Blinder et al (2001) argue that the relevant content should include central banks' economic analyses, actions and internal deliberations, so that the public is clear about what it is trying to achieve, how it goes about doing so, and its probable reactions to the contingencies that are likely to occur. This allows people to form accurate expectations about how the bank will act in the future, which can increase the effectiveness of monetary policy.

Few studies have assessed the nature of the content in central bank communication. Of those that do, they mainly focus on the existence or quantity of certain public information rather than assessing the quality of that information. For example, Fry et al (2000) developed a transparency index for 94 central banks by calculating the average of 3 elements: whether the central bank provides prompt public explanation of its policy decisions, the frequency and form of forward-looking analysis provided to the public, and the frequency of bulletins, speeches and research papers. Eijffinger and Geraats (2006) adapted this index to 5 dimensions: political transparency (openness about policy objectives), economic transparency (openness about data, models and forecasts), procedural transparency (openness about the way decisions are taken), policy transparency (openness about the policy decisions) and operational transparency (openness about the implementation of policy actions). Similar studies include Bini-Smaghi and Gros (2001), de Haan, Amtenbrink and Waller (2004) and Dincer and Eichengreen (2014). Implicit in these studies is that the idea that, for example, simply holding a press conference or publishing a model forecast is a demonstration of transparency. But, just because someone asks you a question, it doesn't mean you have to answer it and giving a press conference does not necessarily mean you are being transparent. For this reason, we want to probe the content of communications more deeply to see if we can identify the degree to which they explain the reasons behind decisions. We believe ours is the first paper to attempt something like this and is one of the novel contributions of this work.

2.3 Who is the audience?

Central banks communicate with a wide variety of audiences including economists, financial market participants, politicians, the media, and the broader public. Each has different needs for information. Economists, who understand the economic data and models better, are more likely to be interested in technical details about forecasts, while journalists and politicians may like to know more about the bottom line.

Reflecting this diversity of audiences, central banks have adopted a variety of communication strategies. One common strategy is to communicate via different channels. For example, the RBA's quarterly SMP provides a comprehensive economic summary that helps particular audiences, especially economists and financial market participants, understand the economic forecasts. RBA speeches tend to have a broader and more varied audience than monetary policy statements, but frequently contain similar information. A slightly different approach adopted by the Bank of England has been to add a visual summary to its Inflation Report. The visual summary includes the same key information as the traditional Inflation Report, but is written in less-technical language and contains a much heavier emphasis on visuals as a means of conveying information. The visual summary has been found to improve the comprehension of messages delivered in the Inflation Report for both members of the general public and economics students (Haldane and McMahon 2018).^[5] Other publications, such as bulletins and research papers, may provide indirect insights into central bank thinking to more academic audiences. There are also an increasing number of central banks that use social media (such as Twitter, YouTube, LinkedIn, etc) to provide information and target their audiences in more accessible ways (Bjelobaba, Savic and Stefanovic 2017).

Nevertheless, despite a variety of approaches that reflect implicit views about audiences and needs, the audience of communication is the least studied aspect of the 3. Born, Ehrmann and Fratzscher (2011) found that financial stability reports and speeches and interviews have different effects on financial stability. But it was not clear how the various audiences of those products, and how well the products targeted their audiences, affected the results. The existing literature tends to take the audience as given. For example, when assessing the transparency of communications, Fracasso et al (2003) used economics PhD students to rate central bank reports. This choice implicitly defined the audience they were considering. We show in Section 4.4 that the choice of audience can affect how effective a particular communication is judged to be. What works for some audiences may not work for other audiences.

Footnotes

The FK grade level is calculated as: $0.39\left(\frac{numberofwords}{numberofsentences}\right)+11.8\left(\frac{numberofsyllables}{numberofwords}\right)-15.59$. [2]

Although an implicit assumption in much of the literature, and certainly practice, is that a lower grade level is better regardless of the topic or audience. We touch on this implicit assumption later where we note that communication is multifaceted and more of one quality in writing can lead to less of another. [3]

A simple example may help illustrate the point. ‘The cat sat on the mat’ is a very clear sentence. It is, however, purely factual and leaves a lot of information out. In contrast, ‘The cat sat on the mat because it was warm’ is still clear but now provides information on why the cat sat on the mat. This information could, for example, allow a reader to form expectations about what the cat might do in the future. [4]

Haldane and McMahon (2018) also found that the visual summary of the Inflation Report improved economics students' reported perceptions of the Bank, but this is not the case for the general public. Furthermore, Bholat et al (2019) found that the increase in public comprehension is mainly due to the reduction of complexity of language rather than the inclusion of icons in the summary. [5]