With interest rates stuck at rock bottom since the Great Recession more than a decade ago, central bankers have lost their favorite economic gearshift. For decades, the US Federal Reserve could rev up the economy by slashing borrowing costs or slow things down by jacking up rates.
So today, what can European Central Bank president Christine Lagarde or Fed chair Jerome Powell do? Rather than trying to send signals via rate moves, perhaps speaking directly to consumers will work, a number of central bankers and economists have been suggesting over the past few years.
They may be right, according to Boston College’s Francesco D’Acunto, Karlsruhe Institute of Technology’s Daniel Hoang, Bank of Finland’s Maritta Paloviita, and Chicago Booth’s Michael Weber. An experiment they conducted in June 2020 in Finland suggests that bluntly stating what monetary authorities are trying to accomplish can have an effect on ordinary people’s expectations and their resulting behavior. But just divulging the arcane policy details of how they’re trying to reach a goal doesn’t work, they find.
The experiment involved around 2,500 Finnish men who were asked to respond to messages about ECB policy as posted on Twitter. The researchers had access to the results of the men’s military IQ tests, which allowed them to assess the effects of the messaging on people with different measured levels of intelligence.
They showed one-third of the respondents a tweet by Olli Rehn, governor of the Bank of Finland, saying the ECB would “do whatever is necessary to minimize the financial damage to citizens caused by the corona crisis.” The researchers designated this a “target-focused” message, as it set out what the central bank was trying to do.
A second group read a different Rehn tweet: “New EUR750 billion Pandemic Emergency Programme (PEPP) launched by the European Central Bank.” The researchers considered this an “instrument” communication, focusing on how the monetary authorities were trying to reach their goal. The final one-third of respondents served as a control group, reading a Rehn tweet that had nothing to do with ECB policy or the pandemic.
The respondents who read the first, target-focused tweet subsequently said they expected monthly gross incomes to rise €70–€80 as a result of the ECB policy, according to the research. This effect was fully driven by the target-focused communication, D’Acunto, Hoang, Paloviita, and Weber find. By contrast, those in the instrument communication and control groups didn’t report any “statistically or economically significant” revisions to their household-income expectations, the researchers report.
“Ultimately, target communication is not only more effective than instrument communication in managing the expectations of the average consumer, but it helps especially with managing the expectations of the least sophisticated groups in the population,” the researchers write.
They find that the respondents with lower intelligence scores were most responsive to Rehn’s target-focused message. This is the same group that their previous research finds is least responsive to central banks’ traditional, trickle-down messaging. (For more, read our Winter 2019/20 feature “Why central bankers need to change their message.”)
“Our results indicate that monetary policy communication can be a successful policy tool to manage ordinary households’ expectations,” the researchers find, “but this effectiveness is enhanced when central banks emphasize the targets and aims of their policies rather than the speciﬁc policy measures with which they want to reach such aims.”