SNB - An Information Vacuum

Key points

• After the appointment of Hildebrand as chairman of the SNB, the amount of communication has been reduced.
• We look at economic theory and empirical evidence to find the likely implications of a more opaque central bank.
• In general, with a less transparent central bank, one should expect increased volatility in interest rates as well as in the exchange rate around speeches and monetary policy announcements, all other things being equal.

As of 1 January 2010, Philipp Hildebrand replaced Jean-Pierre Roth as chairman of the governing board at the Swiss National Bank (SNB). Not a major event, given that Hildebrand has expressed no indications to alter how monetary policy is implemented by the SNB. However, there could be a significant change in the way the SNB communicates its monetary policy. Indeed, since the December monetary policy meeting, the SNB has been unusually quiet. In this note we analyse how central bank transparency affects the success at which central banks implement monetary policy, with an emphasis on the SNB.

Limited amount of news out of Zürich

Since December's monetary policy meeting, the amount of news from the SNB has been limited and no speeches are scheduled before the next policy meeting in March. If this holds it will be an unusually quiet period for the SNB. A count at the SNB's homepage reveals that during 2009 the three members of the governing board held 23 speeches on monetary policy - excluding speeches held on the days of a monetary policy decision. Furthermore, the members of the governing board were also frequently interviewed in Swiss and international financial newspapers. During January, however, there have been no official speeches and only two interviews given to the media. Going forward it will be interesting to see if this constitutes a new communication strategy by the SNB.

One of the least transparent central banks in the OECD

A recent OECD analysis1 shows that the SNB is one of the least transparent central banks in the OECD. It only holds scheduled monetary policy meetings once every quarter and in addition it is not very transparent on its economic analysis. This stands in contrast to the general movement among the world's central banks over the past 20 years towards more transparency. Which according to theoretical and empirical evidence helps central banks to be more successful in achieving their policy goals2. More specifically, data reveals that central banks that have been good at communicating their policy have obtained a lower level of inflation, a lower degree of inflation volatility and a greater extent of predictability of monetary policy - a prerequisite for low financial market volatility. The SNB has during the past two decades, however, been favoured by a period of very low and stable inflation, which could reduce incentives for increasing transparency.

Implications of a policy change

If there has been a change in the communication strategy by the SNB, it could affect financial market volatility more than during “normal” policy regimes. That is, less communication could prove a dangerous strategy at a time when the SNB is employing all of its policy tools - i.e. interest rate setting, intervention on the currency market and asset purchases. Less information could spell increased price movements around times of important policy communication, such as monetary policy meetings and speeches.

Theoretical considerations on central bank transparency

Geerats (2002) distinguishes between five aspects of transparency: Political transparency (objectives of monetary policy), Economic transparency (sharing of economic information), Procedural transparency (the decisional process), Policy transparency (explanation of policy decisions) and Operational transparency (information on transmission disturbances).

Not everyone agrees that increased transparency is always more beneficial. Studies have shown that the optimal degree of transparency does not necessarily equal full transparency (see e.g. the survey by Hahn, 2002). One the one hand, the increased central bank independence has to be met by some level of transparency and accountability to counterbalance this “democratic deficit”, but on the other, greater transparency may crowd out private information, hence the private agents pay too much attention to central bank information, which could imply increased market volatility. A classical theoretical study by Morris and Shin (2002) shows that if the information of the central bank is of poor quality, compared with the information of the private sector, then providing the private sector with the information of the central bank is harmful. However, Svensson (2006) shows that this result holds only for unrealistic parameter values.

For inflation targeting central banks (such as the SNB) transparency is viewed as an important instrument in order for the central bank to stabilise the longer term inflation expectations and hence fulfil its objective. Empirical studies tend to find that increased transparency anchors longer term inflation expectations and in addition also lowers and stabilises the actual inflation outcome.

Looking at similar central banks in Europe, the tendency has been to increase transparency. Norges Bank (Norway) and Sveriges Riksbank (Sweden) have in recent years begun publishing their projection of the policy rate. A reason for doing this is to increase leverage over the longer term interest rates in the economy and hence be better in steering the important variables of the economy. As Norges Bank and Riksbanken are inflation forecasting central banks, the publication of an endogenous interest rate forecast is important information to the private agents when the central bank publishes its inflation forecast. See e.g. Woodford (1999) for more on this topic.

Sources

Geerats, P. (2002). Central bank transparency. Economic Journal 112(483), pp. 532-565

Hahn V. (2002). Transparency in Monetary Policy: A Survey. Ifo Studien 3, pp. 429-455

Morris S. and H.S. Shin (2002). Social value of public information. American Economic Review 92(5), pp. 1521-1534

OECD (2009). The Role of Transparency in the Conduct of Monetary Policy. OECD Working Paper (724).

Svensson L. (2006). Social value of public information: Morris and Shin (2002) Is Actually Pro Transparency, Not Con. American Economic Review 96(1), 448-451

Woodford M. (1999). Commentary: How Should Monetary Policy Be Conducted in an Era of Price Stability. Published in New Challenges for Monetary Policy - A symposium sponsored by the Federal Reserve Bank of Kansas City, Jackson Hole - Wyoming

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