Communication is, by now, an integral element of central banking (Blinder et al. 2008a). Over the years, central banks have increased their transparency and their accountability to the public (Eijffinger and Geraats 2006, Dincer and Eichengreen 2007), by providing a greater volume of information and communications through a range of channels including inflation reports, press releases and conferences.
This information tends to be available faster, more frequently, and to wider audiences than ever before.
There is abundant evidence that central-bank communication is useful in the context of monetary policy (Blinder et al. 2008b) as well as macroprudential policy (Born, Ehrmann and Fratzscher 2010). There is also evidence that the quality of communications is important to overall communications efforts.
Fracasso, Genberg and Wyplosz (2003) show that well-written inflation reports are associated with a higher predictability of decisions. Jansen (2011) argues that clarity of testimonies by the Fed chairman, for instance, lowers financial-market volatility.
At the same time, central banks sometimes struggle with the clarity of their communications. For example, Bulíř, Šmídková, Kotlán, and Navrátil (2008) and Bulíř, Čihák, and Šmídková (2013) find that central banks in a range of countries were communicating in a ‘clear’ way between 60% and 95% of the time on average. Why such a diverse range? In recent work (Bulíř, Čihák, and Jansen 2013), we study why clarity of communications varies in seven central banks across three continents.
We ask whether the clarity of central-bank communication depends on the context; if clarity is sensitive to the inflation outlook or uncertainty, or both; and how the global financial crisis has affected central-bank communication.
Under our null hypothesis, communication clarity is impaired when the bank is unsure about future developments or when it needs to explain larger deviations from the inflation target. Suppose that current inflation runs above the target, but the official inflation projection is close to the target, and the bank identified numerous mutually offsetting demand and supply inflation factors. It is going to be harder to present these developments in an accessible manner, presumably leading to less clarity. Nonetheless, the central bank may be aware of the need to present a clear message to the public and it may devote more resources to communication. If it succeeds, communication clarity may remain unchanged, or it may even improve.
How do we measure clarity and its drivers?
One way to think about communication clarity is to ask how easy it would be for someone to grasp the written message. This notion of clarity of writing underlies the so-called Flesch-Kincaid grade level (Kincaid et al. 1975) that can be interpreted as the number of years of education needed to sufficiently comprehend a text. The Flesch-Kincaid has been applied to everything from army training manuals to corporate annual reports to political speeches. The Flesch-Kincaid is objective to the extent that it only uses textual characteristics of texts, such as the number of words, sentences, and syllables. The intuition is that many words per sentence or many syllables per word decrease readability and make it harder to grasp the message. The Flesch-Kincaid varies from ten to 19 years in our sample, with differences over time, across countries, and among the various communication channels (Figure 1).
Figure 1. Flesch-Kincaid grade level for written central-bank communications (In years of schooling; blue and red lines represent inflation reports and press statements, respectively)
Source: Bulíř, Čihák and Jansen (2013). Authors’ calculations based on information from the national central banks’ websites.
Note: The FK grade level can be interpreted as the number of years of education needed to comprehend a text.
In our examination of variation in written clarity, we include five quantifiable factors capturing the context in which communication took place:
- The bank’s overall assessment of inflationary risks (based on content analysis).
- The uncertainty surrounding this assessment.
- Forward-looking inflation gaps.
- Contemporaneous inflation gaps (deviations from the inflation target).
- Voting dissent in monetary-policy committees.
Results: Drivers of clarity vary across countries
We find statistically significant variation in the Flesch-Kincaid over time for each of the seven central banks, partly reflecting idiosyncratic trends. The inflation reports have become clearer over time in Chile, Sweden, and the UK (although the UK’s reports became less clear after 2007), improving by almost one fifth of a year of schooling per year. In contrast, the Eurozone Monthly Bulletins and in particular Thai inflation reports have become less clear during the sample period, by about one tenth and two fifths of a year of schooling per year, respectively. For the Czech Republic and Poland there are no statistically significant trends. Turning to our main question of the relationship between the clarity of communications and the broader economic environment, only a handful of factors structurally appear to affect readability:
- First, the assessment of inflationary risks is associated with a reduction in Flesch-Kincaid in four out of seven sample countries, but this finding is statistically significant only for the Czech Republic.
None of the factors are statistically significant in a panel setting. In other words, it appears that the banks react to additional inflation factors with more drafting effort, however, with uneven results.
- Second, uncertainty regarding the inflation assessment does not have a significant impact on report clarity.
- Third, the forward-looking inflation gap reduces clarity, that is, increases its Flesch-Kincaid in three countries, however, only the UK results are statistically significant.
In this case, the expected over/undershooting of the inflation target corresponds to a decline in readability of about three quarters of a year of schooling.
- Fourth, for most countries, past inflation deviations from the target are associated with lower clarity of an inflation report; however, the results are statistically significant only for the Czech Republic.
- Finally, more dissenting votes in monetary-policy decisions are associated with an increased clarity in the UK and Sweden, but the finding is statistically significant only in the former country.
Readability of press releases and statements follows similar patterns as that of inflation reports.
We also examine the effect of the global financial crisis on clarity, finding that for three countries – Poland, Sweden, and the UK – the crisis significantly reduced the clarity of communication, adding 1-2 years of schooling needed to understand the reports, on average. For the other countries, the effect was not significant.
Conclusions: Single model for clarity not appropriate
Our findings suggest that a single model for clarity of communication is inappropriate. Rather, country-specific and institution-specific factors should be taken into account. This mirrors earlier discussions, which stressed how communication strategies are often linked to country-specific and institution-specific factors (Blinder et al. 2008b).
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