Necessity as the mother of invention monetary policy after the crisis

mother of invention. Indeed, one of these unconventional tools, forward guidance, relies
entirely on communication. But more communication was also required regarding other
policies.
The crisis, the deployment of unconventional monetary policies, and the broader
(sometimes tacit) mandates made discussions surrounding the actions of monetary policy
committees more controversial than ever. And that, in turn, affected the way central banks
communicated. The need for more and better communication was exacerbated by the
increasingly public debate over such controversial areas as the possible distributional
effects of UMP, or the role of the central bank in bailing out financial institutions—or, in
the case of the euro area, entire governments. For all these reasons and others, there have
been many changes in central bank communication practices since the crisis. To list only
a few of the most important ones:
Both the Federal Reserve and the Bank of Japan introduced a formal inflation
objective in early 2012. Historically, inflation objectives had been introduced
following periods of high and volatile inflation in an attempt to stabilize inflation
at lower levels and to anchor inflation expectations. In contrast, the inflation
objectives in the United States and Japan were introduced following periods of
low inflation (Ehrmann, 2015).
The Fed has expanded its communication toolkit in various other ways: Since
April 2011, the FOMC chair holds regular press conferences, and since 2012, the
Summary of Economic Projections contains a forecast for the Fed’s policy rate,
in the form of a “dot plot” that collects the judgements of the individual FOMC
members of the appropriate level of the policy rate over three calendar years and
the longer run.
The Bank of England now releases the minutes of its policy meetings and the
Inflation Reports at the same time as its policy decisions.
A number of central banks have aired substantially more internal disagreement
since the crisis. The most prominent such example may be the ECB, which saw
its earlier principle of one-voice communication seriously challenged in light of
the considerable disagreement among its Governing Council members, and
started releasing regular accounts of monetary policy discussions as of January
2015.
All of these changes go in the same direction—towards more transparency—a trend
which is in line with the evolution we had already observed in our 2008 article and with
the survey results summarized in Table 9 above.
Having seen such profound changes in the practice of central bank communication, it
seems natural to ask to what extent these changes are here to stay. Or will they be scaled
back once normalcy is restored? Our take is that many of the more structural changes are
here to stay. It will be close to impossible, and most likely also undesirable, to stop holding
press conferences or publishing minutes. In a similar vein, we would not expect the
Federal Reserve or the Bank of Japan to abolish their inflation objectives, though their
levels might possibly be adjusted (see Section 2).
25