Monetary Policy

Central banks have a system for announcing the future path of monetary policy: forward guidance. It contributes to the reducing uncertainty in the economy and decreasing market volatility and helps economic agents adjust to expected changes in advance.

In the last decades, economists have created a number of indices of central bank transparency. However, all of them target a professional audience. We have built a new index to cover regulator efforts to communicate with a broader audience.

Have central banks opened up due to the increased openness of the authorities or the developments of new media? This is not the case. Openness was a response to unprecedented shocks that has helped to withstand such shocks when traditional tools have turned out to be ineffective.

The more clearly businesses and households understand the central bank's policy, the closer their inflation expectations are to the target. However, it is possible for monetary policy to be excessively transparent, which can bring more harm than benefit.

Negative news in the media covering the overall economic situation may act as a meaningful predictor of the dynamics of Russians’ inflation expectations and their current inflation perceptions. These are most driven by news about the ruble exchange rate and economic crisis.

A central bank may have an information advantage enabling it to better forecast macroeconomic indicators and, hence, make decisions that are not expected by the market. This advantage may exist both in reality and solely in the form of the market’s belief in it.

The Fed waited too long to tighten the policy in its anti-inflation stand, believing the acceleration of prices to have been temporary. The biggest concern for markets now is whether the Fed could avoid another policy mistake with regards to over hiking interest rates.

Central banks strive to speak clearly and simply – this is critical to effectively targeting inflation. We assessed the comprehensibility of the Bank of Russia's communications using neural networks – it showed that the level of its texts is rather complicated for the public.

Central banks do not have tools to reduce inequality, but this does’t mean that they can do nothing to make a society more equitable. They are able to contribute to this goal by fulfilling their mandate, namely by keeping inflation low and preventing financial crises.

Designed its policy response during the Covid-19 crisis, the Russian central bank addressed the consequences and spillovers of all three shocks facing the Russian economy: the demand and supply shocks, increased asset price volatility, and a collapse of oil prices.

Real-world experience confirms that forward guidance makes central bank policy even more predictable.

Not so long ago, the basic principle central banks followed in their communication policy was to completely avoid communicating. Now, in the wake of a drastic change in their communication with the markets, central banks are mastering new means of communication with the public.

The worldwide development of the inflation targeting regime raises new and controversial issues, which the Bank of Russia too must confront.