Communication in Monetary Policy: Experiences of the Swiss National Bank

Thomas Jordan, Alternate Member of the Governing Board

Conference on "Zentralbankkommunikation", University of Siegen (overhead transparency), Siegen, 24.06.2006

Central banks have become significantly more transparent about their goals and procedures over the last two decades. On the one hand, this change was triggered by the requirement for greater accountability of independent central banks in democratic societies. On the other, this tendency towards more openness was promoted by the recognition that transparency improves the effectiveness of monetary policy. Under these conditions, a well thought-out communication strategy is instrumental in achieving the central bank’s objectives. However, the burgeoning theoretical literature does not provide any clear guidance on how to design transparency and communication policies in practice.

Since the collapse of the Bretton-Woods fixed exchange rate regime, the Swiss National Bank (SNB) has continuously demonstrated a desire for its monetary policy to be well understood by a wider public. When it switched from a monetary targeting regime to a concept based on inflation forecasts at the end of the 1990s, it undertook a significant augmentation and intensification of its transparency and communication activities. As a result, a broad range of different kinds of information is now issued regularly. The SNB intends to manage market expectations by publishing an inflation forecast based on the assumption of a constant interest rate and by conveying its view of future economic conditions and the likely policy stance.

The experiences of the SNB with its communication policy within the new monetary framework have been very positive. The public and the markets have interpreted incoming information broadly the same way as the SNB. Thus, they seem to have well understood both the SNB’s monetary policy framework and its economic analysis. However, policy surprises may occur now and then. As long as these are comprehensible to the public and the markets, there is unlikely to be any negative impact on the credibility of the central bank.

In an ever-changing economic environment, transparency and communication need to evolve steadily. There is no magic formula for developing a single optimal communication policy. Different approaches for communicating monetary policy may be equally effective in terms of market responses and predictability of policy decisions. However, communication is culturally and politically specific, and depends ultimately on the central bank’s inflation record. Trendy concepts, such as publishing the minutes of monetary policy meetings or the central bank’s view on the path of future interest rates, need to be taken with a grain of salt and judged against the specific institutional, political and historical characteristics of a country. In general, a change in communication activities should ultimately increase the central bank’s credibility, reputation and competence, and should not be an end in itself.