Central Banks Are Talking More Than Ever

Robert Shiller, in a discussion paper earlier this year, laid out the argument for economists paying closer attention to the "narratives" surrounding economics. To Shiller, popular narratives drive more of the fundamental economic outcomes than economists are typically willing to admit.

For example (one provided by Shiller), the 1921 recession following the end of World War I was, in part, driven by narrative. In contrast to the typical explanation of why it occurred (a central banker went on a long vacation), there are more fundamental reasons for the downturn, including a 50% increase in the price of oil (with wide-spread fear that oil production would peak in a few years) and-probably the most important-deflation expectations. Because consumers believed that prices would fall, they held back from making purchases.

This was the era of the "profiteer", the word used to describe price gouging. Thrift became a virtue, and there were calls to avoid buying anything other than the essentials. Consumer spending plummetted, leading Shiller to describe the recession as a "consumer boycott" lead by narrative, not by a traditional business cycle.

While the example above is buried deep in history, there is applicability to the present. Specifically, the rise in central bank communications. There have never been more speeches given by representatives of central banks than today. In a recent speech given by the Chief Economist of the Bank of England Andrew Haldane,  he calls for less complex and more accessible communication of monetary policy. Ostensibly, this is to increase transparency and trust with the public and describe their actions and intentions to markets.

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