When the European Central Bank sent markets reeling yesterday with moves designed to stimulate growth, the 24 people who made that decision could remain comfortable that their exact arguments and misgivings expressed prior to the final decision would be shielded from public view. The broader trend though is to bring the workings of monetary policy out of the shadows, and that means a tricky job to balance a quest for transparency at central banks with a desire for frank and open discussion.
The Bank of England is facing this very challenge as it makes moves to open up the workings of the Monetary Policy Committee (MPC) which sets UK interest rates. It can take some cues based on the experience across the Atlantic and from some intriguing results from a deep-dive into the transcripts of central banker discussions.
Since the MPC was formed in 1997, the bank has released minutes of the deliberations but resisted making available less edited accounts of the meeting discussion. In that respect, the Bank of England differs from the US Federal Reserve which releases, after a five-year lag, verbatim transcripts of the deliberation of the Federal Open Market Committee (FOMC).
The Bank of England is not the only major central bank that is less transparent than the Fed; the ECB does not even release timely minutes of Governing Council meetings.
However, these less transparent central banks are potentially changing. Mario Draghi, ECB President, has spoken of the desirability of “a richer communication about the rationale behind the decisions that the governing council takes”. Moreover, in April, the Bank of England announced that they would conduct a review of the costs and benefits of releasing transcripts of the MPC meetings.
It seems like an easy decision at first glance. The most basic argument for transparency is that central bankers are not elected and yet have considerable economic power. As such, democratic accountability dictates that there should be some public information about the decisions and decision making of central bankers.
Checks, balances
But it is harder than you might think to work out what the best disclosure policy might be. The Bank of England review will look at what the effects might be of greater transparency. In particular, given that deliberation takes up the vast majority of such committees’ time, it is important to ask what the effect of greater transparency might be on how the committee members talk amongst themselves.
Policymakers and academics have identified potential positive and negative effects of an increase in the amount of information about the internal workings of a central bank that is revealed to the public. They all rely on the idea that monetary policymakers care about their reputation for being smart, and react to increased visibility by changing their behaviour to protect this reputation. The main positive effect is that transparency induces a discipline effect; knowledge that their actions will (potentially) be subject to public scrutiny incentivises the committee members to work harder and behave better as in the career concerns model of Bengt Holmstrom.
The main negative effect is that transparency will induce conformity amongst members and lead to a stifled, and potentially useless, debate. In fact, central bankers have cited such reasons in their resistance to releasing transcripts. For example, before the Fed started releasing transcripts in 1993, Fed chairman, Alan Greenspan, said of how the release of transcripts would affect the FOMC meeting:
I fear in such a situation the public record would be a sterile set of bland pronouncements scarcely capturing the necessary debates which are required of monetary policymaking.
In our recent work, Stephen Hansen, Andrea Prat and I explore the effects of transparency on deliberation by exploiting the natural experiment that led to the release of the FOMC transcripts. Due to political pressure from the Senate and the efficient archiving of the Fed staff, we have access to the transcripts of the FOMC meeting before November 1993. That means we can contrast the discussion from when members did not know that their verbatim statements may possibly become public with those from a time when they knew that the full record would be released. By using computational linguistic models, in particular methods designed to tease out themes and topics within text and speech, we are able to measure a number of dimensions of the deliberation. We are therefore able to measure the effect of increased transparency on debate amongst policy makers.
Rather than just compare before and after transparency, we also use what is called a “difference-in-differences” approach. Since the reputational concerns of greater transparency will affect different members differently, we can try to pin down whether the effects we find are driven by reputational concerns. We can check how those who should be impacted most by the change react relative to those who should be less affected. Economic models predict that reputational concerns decline with experience. The basic idea is that, as observers gather more and more information about a policymaker, there is less he or she can do to change observers’ views on their ability. As such, we estimate the differential effect of transparency on FOMC members with less experience in the Fed.
Our evidence suggests that both discipline and conformity effects operate simultaneously. We find that, following the change in transparency, more inexperienced members come into the meeting and discuss a broader range of topics during the discussion on the economy and, while doing so, use significantly more references to quantitative data and staff briefing material. This is indicative of discipline as inexperienced members acquire greater information between meetings.
On the other hand, these inexperienced members also exhibit negative behaviour in that they disengage with the subsequent debate about the appropriate policy and also speak more like Chairman Greenspan.
Measuring up
In order to gauge the overall effect of transparency on the information content of inexperienced members’ statements, we measure what happens to their influence, where influence measures the extent to which a member affects what others talk about. We find that transparency increases the influence of new members, indicating that their statements contain relatively more information overall. The natural interpretation is that the discipline effect more than offsets the conformity effect at the Fed, even though the latter indeed affects behaviour in line with policymakers’ concerns.
It leaves the Bank of England and the ECB with a pretty clear lesson if they want to succeed in their efforts. The Fed experience shows that transparency brings more information to the meeting in spite of a more sterile debate, but it remains a hard trick to pull off. Both the European banks will have to structure the deliberation process in way which maximises the discipline effect which increases the information at hand while minimising the conformity effect which can deaden debate.