Why clear communication is critical in conveying matters of monetary policy

The Central Bank of Kenya. Unconventional times require unusual policy measures. PHOTO | FILE 

By JARED OSORO

Of the many jokes that have been made about economists and their profession, one of the most piercing and yet humorous, is the quip that they are a lot that “finds something working in practice and wonders if it will work in theory”.

The joke, which is ascribed to Walter Heller — an economic advisor to two US presidents John F. Kennedy and Lyndon B. Johnson — tempts many to conclude that economists are owning up to the fact that they are too theoretical and don’t really know what will work in the real world.

Is that a justified conclusion? The answer can easily be derived from Ben Bernanke’s autobiography, The Courage to Act: A Memoir of a Crisis and its Aftermath.

And that answer is an emphatic no! When in February 2006 Bernanke took over as chairman of the Federal Reserve Board— the global financial crisis that subsequently yielded the economic meltdown was at the advanced stage of formation.

As a demonstration of the “courage to act” Bernanke started inculcating in the Fed the discipline of clear communication in matters monetary policy.

True to his modest and honest demeanour, he said of Alan Greenspan – his predecessor —as having set “the standard of excellence in economic policymaking”.

Should this make one assume that Bernanke was imagining of Greenspan’s “shoes being too big to fill”? I could argue based on a careful comparison of Bernanke’s book and Greenspan’s memoirs –The Age of Turbulence: Adventure in a New World, published in September 2007 — that the former was reluctant to fit in the latter’s shoes; he apparently was more than keen to get himself a new pair.

For the 17 years he was the Fed chairman, Greenspan’s pronouncements on monetary policy decisions were largely convoluted. Greenspan would say the federal open markets committee (FOMC)—an equivalent of the Central Bank of Kenya’s Monetary Policy Committee (MPC)—has voted to give “asymmetric directive toward tightening”.

For the same decision, Bernanke would easily say that the FOMC has authorised “a raise in interest rate that it deems necessary”.

It was 19 years too late— 17 years at the helm of the Fed and nearly two years to the publication of his memoirs —that Greenspan found it compelling to wonder:  “whatever happened to the English language”? In there lies the stark contract between the two central bankers.

One had the ability to communicate clearly and simply about a complicated problem. The other had the talent to do the exact opposite —complicate the language even when the problem may be simple!

The latter’s talent earned him celebrity status, inspiring journalist Bob Woodward to publish, in 2000, Maestro: Greenspan’s Fed and the American Boom.  It is as if the clarity of the prose in “Maestro” was meant to compensate for the pain of enduring Greenspan-speak.

I see four areas—admittedly all of which bringing out the differences in intellectual persuasion between Bernanke and Greenspan—where those insights stand to illuminate our economic management.

First is the evident conviction that inflation targeting is a compelling framework for guiding momentary policy conduct.

As Bernanke explains, those sceptical of inflation targeting simply look at the name and imagine that is implies monetary policy conduct would be deemed successful just by attempting to keep inflation close to target and praying that the rest will be fine