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Central banking in times of complexity

Panel remarks by Benoît Cœuré, Member of the Executive Board of the ECB, at a conference on the occasion of Sveriges Riksbank’s 350th anniversary, Stockholm, 25 May 2018

It is fitting that we are discussing the future of central banking here in Sweden. Sveriges Riksbank is considered by many to have been the first central bank in the world, blazing a trail that all other countries followed. Over the years, central banks have evolved as institutions, charting a path from facilitating payments and financing governments to acting as independent guarantors of price stability.

But in recent years, a broad perception has emerged that central banks have accumulated a lot more power. While some of them have indeed been given, or been given back, powers to supervise banks and to preserve financial stability, this perception in part simply reflects the fact that central banks have become more present. Their actions have become more numerous. And each single action has become more visible.[1]

As a result of the crisis, central banks’ toolkits have also become much more complex, both in the sense of the variety of instruments being used simultaneously, and in the sense of each individual instrument being more complex in its implementation and its effect on the economy.[2]

There is little disagreement among experts that this parallel increase in complexity and central bank presence was necessary. But growing complexity poses a serious challenge for central banks in terms of their outreach and their accountability to the general public.

Before the crisis, nobody needed to know the technical details of interest rate setting to understand what the central bank’s intentions were when raising or lowering interest rates. Institutional details were not important and were best left to experts within the walls of the central bank.

Suddenly, with the arrival of non-standard measures, the operational details started to matter.

Take large-scale asset purchases as an example.

The public are right to ask questions when they are told that “the central bank is printing money”. They are right to ask questions when they are told that we are buying government and corporate bonds.

But in order to answer such questions, central banks need to explain the difference between different types of central bank liabilities. And that we buy government bonds according to our capital key, and corporate bonds according to the market portfolio. And so on.

We also have to rectify misperceptions about the distributional consequences of non-standard measures. There is a widespread belief, for example, that central bank asset purchases contribute to “making the rich richer”. In the euro area, some have also argued – sometimes in contradictory ways – that monetary policy has been transferring wealth across economies.

What these critics neglect to mention, of course, is that monetary policy always has distributional effects – even when it involves simple changes in our key policy rates. They neglect to mention that asset purchases have been powerful in supporting the most vulnerable in our societies, those without a job, and that our mandate is to safeguard price stability in the euro area as a whole – not just in some countries.[3]

But perceptions matter.

So, my point is that if our citizens can no longer understand what it is we are doing, then they may no longer be sure that we are doing the right thing – that we are pursuing our mandate within the limits we are given.

Complexity and central bank independence

Central banks are, of course, not the only public institutions that grapple with complexity. From climate change to consumer protection, and from bioethics to energy regulation, public policy has to take a stance on very complex issues – and communicate it to the public.

Yet there is a crucial difference for central banks.

Citizens who are unhappy with their health services or taxation can voice their opinion in the course of the political and legislative process and at the ballot box.

But many central banks are independent. This means that, provided they are not in breach of their mandate, citizens unimpressed with their actions have no direct recourse. They cannot simply elect a new central bank leadership.

Some might see this as a symptom of what political scientist Yascha Mounk recently called “undemocratic liberalism” – a situation in which citizens’ individual rights are respected but in which they feel that their preferences are ignored because policy is delegated to technocratic institutions or “unelected powers”, as Paul Tucker has put it.[4] Nobody wants citizens to be faced with a choice between illiberal democracy and undemocratic liberalism.

Of course, the democratic legitimacy of our institutions rests on decisions made and laws written by representatives of the people. In the case of the ECB, the mandate was conferred democratically as part of the Maastricht Treaty and, by enshrining it in primary law, legislators gave it the highest legal status.[5]

An elaborate system of checks and balances ensures both input legitimacy – the legitimacy of central banks’ mandates – and output legitimacy – the achievement of the objectives set in those mandates.[6] In other words, accountability is the natural counterpart to independence. Parliaments, as the representatives of citizens, have a central role to play in this respect.[7]

Provided sound systems of accountability are in place, there are good arguments – both theoretical and practical – for central bank independence.[8] These arguments can be summed up in just a few words: independence leads to better long-term outcomes for society.

Pre-crisis, this position went practically unchallenged. There was broad public support for the move towards central bank independence. The reason was simple: people trusted independent central banks, often more so than their elected governments or parliaments.

But that trust has become more fragile, at least among non-experts. In the euro area, for example, the latest surveys suggest that 47% of euro area citizens do not trust the ECB.[9] In other words, even though distrust in national institutions is reportedly even lower, it may no longer be enough for central banks to deliver low and stable inflation for people to trust them.

There are various competing theories about why this might be the case.

For example, there may be long lags in the transmission of non-standard measures to inflation. Similarly, although empirical evidence is inconclusive so far, domestic macroeconomic conditions may be increasingly affected by global developments.[10] In either case, output legitimacy may be more difficult to assert if inflation is proving to be less reactive to central bank actions in the short term.

But a much simpler, and possibly related, cause of waning trust in independent central banks is that their actions have become much more complex over time.

If this is indeed a cause, and if non-standard measures and large central bank balance sheets are here to stay – a discussion that the central bank community has just started – then central banks need to take responsibility.

They need to think deeply about how these trends may affect their role in society, their accountability requirements and, most importantly, how they plan to maintain trust among the public at large.

I believe that central banks can master these challenges. But they cannot do it alone.

Strengthening central bank communication

What central banks need to do is broaden their outreach and explain why it matters what central banks do. This is as much about how we speak as who we speak to.

It is now well understood that central bank communication and transparency can increase the effectiveness of monetary policy.[11] But so far central banks may have concentrated too much on interacting with financial market participants and other experts – an approach that some call “methodological elitism”.[12]

Take the complexity of central bank statements as an example. Based on common measures of text readability[13], the introductory statement delivered at our last ECB press conference was only accessible to university graduates, who constitute only around a third of the euro area population.[14]

We clearly need to do more. Our accountability demands that we bring the monetary policy discussion to the broader public. If done successfully, this would – no doubt – also boost the effectiveness of our policies.

As a result of the crisis, we have already intensified our dialogue with the representatives of European citizens. More parliamentary hearings have been held, and we have received – and answered – a greater number of written questions from MEPs.[15] In all cases, the ECB’s response is made public.[16]

This is an important way to address complexity, as the members of the competent committees can develop a more detailed understanding and deeper scrutiny of central bank policies, and they can benefit from the support of experts.[17]

Another way of dealing with complexity may be to conduct a more differentiated communication strategy – an approach the ECB is actively embracing.

For example, to reach a wider audience, we “layer” our communication, breaking it up into different formats for different audiences. Our website now features explainers which describe complex issues in an accessible way.

Another example of differentiated communication is our “Back to School” programme, which involves our staff going out to speak in schools, in particular the schools they themselves graduated from.

Ensuring that our communication strategy is fit for times of complexity also means adapting to the changing media landscape and the associated decline in people’s attention span. In practice, this means that the only way to get through to people is to be short and simple.

Twitter, for example, gives central banks the opportunity to reach out to younger audiences. The ECB’s Twitter account has over 400,000 followers – we added another 42,000 last year alone. Complexity probably resists being corralled into 280 characters. But we should try.

So, all in all, differentiated communication can help us to deal with complexity, and our accountability obligations require us to pursue this approach.

Strengthening convergence, financial literacy and diversity

But we should also recognise that there are limits to what even the most lucid communication can achieve.

In my view, growing complexity presents challenges which go beyond the remit of a central bank. The reason for this is that communication is a two-way street.

In our context, this essentially means three things.

First, in the case of the ECB, we are the central bank of 19 countries. In each country, citizens’ expectations towards us may well differ.[18] Some may prefer a looser policy. Others may prefer a tighter policy. These expectations may reflect deep cultural differences. But often they also reflect a lack of economic convergence among Member States.

Fostering sustainable convergence, completing banking union and deepening monetary union would therefore not only facilitate the conduct of the single monetary policy – it would also ease our communication with the general public and thereby nurture trust in our actions.[19]

The second consequence is much broader. It relates to the fact that citizens need to be equipped with the knowledge to actually understand central banks’ mandates and tasks.

A recent OECD report highlighted worryingly low levels of financial literacy around the world: only a small majority of adults in the G20 countries understand how inflation affects their purchasing power.[20]

In Germany, only one out of two people know who Mario Draghi is. In the United States, less than one in four were able to correctly identify Janet Yellen when she was chair of the Federal Reserve Board.

This suggests a need to improve financial literacy – no doubt as part of a broader effort to ensure that societies and education systems keep up with a rapidly changing world in which a growing share of people no longer come into contact with news they are not immediately interested in.

Primary and secondary schools should be the main starting point for this endeavour. School curriculums need an upgrade.[21]

In addition, the so-called “Linkster” generation – those born after 2002 – may have grown up with a perception that central banks are the only game in town. So, the crisis might have placed a burden of expectation on central banks that is not appropriate.

The third, and related, implication is linked to diversity.

Our profession increasingly struggles with a lack of diversity – something that may also affect public acceptance and, hence, trust. In the euro area, only two women are currently members of the Governing Council.

Under-representation of women extends to academia too. In Germany, France and Sweden, only about one in four PhD graduates in mathematics and statistics are women.[22] Only one woman has ever won the Sveriges Riksbank Prize in Economic Sciences in Memory of Alfred Nobel: Elinor Ostrom in 2009. And one of the best economists of all times, Joan Robinson, never received it, and it may be no coincidence that she once joked that “the purpose of studying economics is (…) to learn how to avoid being deceived by economists.”

The ECB, together with other central banks, is committed to understanding and addressing the under-representation of women in fields such as finance, economics and central banking.[23] We are committed to fostering diversity – including but not limited to gender diversity – within our staff.

This cannot substitute for more resolute action by European leaders to appoint more women to our Executive Board and Governing Council. But it can help address the problem closer to its root. And it will make us a better central bank.


None of this is to say that broader central bank outreach, improved financial literacy and better diversity are a panacea.

We do not need a population of monetary experts. But building a basic understanding of financial and economic interrelations at an early age would help shape the discursive context in which central banks have to communicate their increasingly complex policies to the general public.

And this, in turn, is a precondition for rebuilding trust, which itself is the foundation of central bank independence. And independence, by design, gives central banks a long enough horizon to allow the results of our actions to become apparent to our citizens – the best form of accountability.

Thank you.

  1. [1]Possibly as a result of this, public awareness of the ECB has increased by 12 percentage points, to 85%, compared with pre-crisis levels. See European Commission (2017), Eurobarometer No 88, December.
  2. [2]For a discussion of the challenges faced by the euro area and resulting complexity for monetary policy, see Cœuré, B. (2013), “Monetary policy in a fragmented world”, speech at the 41st economics conference of the Oesterreichische Nationalbank, Vienna, 10 June.
  3. [3]See also Draghi, M. (2016), “Stability, equity and monetary policy”, 2nd DIW Europe Lecture, Berlin, 25 October.
  4. [4]See Mounk, Y. (2016), “Illiberal Democracy or Undemocratic Liberalism?”, Project Syndicate, 9 June; and Tucker, P. (2018), “Unelected Power: the Quest for Legitimacy in Central Banking and the Regulatory State”, Princeton University Press.
  5. [5]See also Cœuré, B. (2017), “Independence and accountability in a changing world”, introductory remarks at the Transparency International EU Event “Two sides of the same coin? Independence and accountability of the European Central Bank”, Brussels, 28 March.
  6. [6]See Cœuré, B. (2013), “The political dimension of European economic integration”, speech at the 19th Université d’automne de la Ligue des droits de l’Homme, Paris, 23 November.
  7. [7]In the case of the ECB, accountability is discharged to the European Parliament. This takes the form of regular hearings, additional hearings upon request, written questions by Members of the European Parliament (MEPs), and the European Parliament’s yearly resolution on the ECB’s Annual Report. Other institutions provide additional checks and balances. Broadly speaking, the ECB’s accountability is embedded in a network of interactions with institutions such as the European Ombudsman, the European Court of Auditors (ECA), the European Anti-Fraud Office and the European Data Protection Supervisor, according to their respective remit.
  8. [8]The theoretical case for central bank independence was initially based on the time inconsistency literature that followed Kydland and Prescott (1977) and Barro and Gordon (1983). Some of the more recent contributions argue that, because re-election pressures may encourage officials to pander to the electorate and overlook minority interests, there are situations where decisions are best left to non-elected bureaucrats. See Maskin, E. and J. Tirole (2004), “The Politician and the Judge: Accountability in Government”, American Economic Review, 94 (4), pp. 1034-54; and Alesina, A. and G. Tabellini (2007), "Bureaucrats or Politicians? Part I: A Single Policy Task", American Economic Review, 97 (1), pp. 169-179. Other arguments are based on the principal agent model and the observation that technocrats with long tenure will invest more effort in their job since they are insulated from political pressure (see, for example, Eggertson, G. and E. Le Borgne (2010), “A Political Agency Theory of Central Bank Independence”, Journal of Money, Credit, and Banking, Vol. 42, No 4).
  9. [9]See European Commission (2017), op.cit.
  10. [10]See, for example, ECB (2017), “Domestic and global drivers of inflation in the euro area”, Economic Bulletin, Issue 4.
  11. [11]See, for example, Cœuré, B. (2017), “Central bank communication in a low interest rate environment”, speech at an event organised by Bruegel, Brussels, 31 March, and speeches delivered at the ECB Central Bank Communications Conference, 14-15 November 2017. For a broader overview, see Blinder, A., C. Goodhart, P. Hildebrand, D. Lipton and C. Wyplosz (2001), “How do Central Banks Talk?”, Geneva Report on the World Economy, Center for Economic Policy Research, November. The transparency of the ECB has evolved over time, including the publication of the accounts of monetary policy meetings, enhanced disclosure of ECB documents (such as the Emergency Liquidity Assistance framework) and the publication of activities of Executive Board members (e.g. monthly calendars).
  12. [12]See Stanley, L. and R. Jackson (2016), “Introduction: Everyday Narratives in World Politics”, in: Politics 36, pp. 223–235.
  13. [13]This is based on the common Flesch-Kincaid scale, according to which the last introductory statement had a score of 26. For the methodology, see Kincaid et al. (1975), “Derivation Of New Readability Formulas (Automated Readability Index, Fog Count And Flesch Reading Ease Formula) For Navy Enlisted Personnel”, Institute for Simulation and Training, Paper 56.
  14. [14]Source: Eurostat. Figures refer to the euro area population aged 25-54 years with tertiary educational attainment in 2016.
  15. [15]By the end of 2017, MEPs had already sent nearly 450 letters in the eighth parliamentary term, which does not end until 2019, as compared with 62 in the entire sixth term and 128 in the entire seventh term.
  16. [16]Replies to MEP letters are published on the ECB’s website. The ECB also publishes its feedback on the European Parliament’s resolution on the ECB’s Annual Report.
  17. [17]Before each of the regular hearings it holds with the President of the ECB, the Economic and Monetary Affairs Committee commissions briefing papers from a panel of experts, who provide MEPs with technical insights into topics for discussion. The briefing papers include suggested questions that MEPs could address to the ECB President during the hearings. MEPs also organise preparatory meetings with the experts.
  18. [18]See also Draghi, M. (2014), “Central bank communication”, opinion piece published in Handelsblatt on 4 August.
  19. [19]See also Cœuré, B. (2017), “Convergence matters for monetary policy”, speech at the Competitiveness Research Network (CompNet) conference on "Innovation, firm size, productivity and imbalances in the age of de-globalization" in Brussels, 30 June.
  20. [20]See OECD (2017), G20/OECD INFE report on adult financial literacy in G20 countries.
  21. [21]The 2015 OECD Programme for International Student Assessment (PISA) showed that far too many 15-year-old students around the world lack a basic level of financial literacy. This means that these young people cannot even recognise the value of a simple budget.
  22. [22]Figures refer to 2012, the latest available official data. See European Commission (2015), She figures 2015.
  23. [23]A recent example is the Bank of England, Board of Governors of the Federal Reserve System and ECB conference on “Gender and career progression”, London, 14 May 2018.

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