How Communication Transformed the Monetary Policy of Central Banks

In a meeting held on February 12 by the Institute for Studies in Economic Policy/Casa das Garças (IEPE/CdG) in Rio de Janeiro, the President of the Central Bank, Gabriel Galípolo, shared a conversation he had with Caetano Veloso about the communication of monetary policy: “The challenge of communication is enormous for all Central Banks; it’s almost an art.”

Indeed, the communication of the Central Bank has never been as prominent as it is today – and it has never been so demanded. But this is a recent development. Historically, central banks were known for their discretion, preferring to operate with little or no public communication. The maxim “Never explain, never excuse,” adopted by Montagu Norman, former governor of the Bank of England between 1920 and 1944, encapsulated this approach – which drastically changed from the 1990s onward.

At least three developments in economic theory and policy contributed to this true communicational turnaround by central banks: the role of expectations, the adoption of inflation targeting, and the pursuit of independence from political pressures.

Modern macroeconomic theory highlights the crucial role of expectations in the functioning of the economy. Since the 1970s, economists have increasingly recognized that the way economic agents (companies, consumers, and investors) form their expectations, primarily about inflation, directly impacts the effectiveness of monetary policy. In particular, they began to articulate the idea that their inflation forecasts incorporate signals emitted by the monetary authority, and that their behavior (pricing, wage demands, and investment decisions) is influenced by these signals. From this interpretation, central banks began to consider that a transparent approach to monetary policy might be a better alternative for achieving economic stability.

The second major development occurred in 1989, when the Reserve Bank of New Zealand introduced a new approach to monetary policy known as inflation targeting. In this system, the central bank publicly commits to achieving a specific inflation rate over a set period. The strategy involves clear and open communication about the bank’s policy objectives and the tools that will be used to achieve them. This approach marked a dramatic shift from the previous focus. Inflation targeting was progressively adopted by many central banks as the 1990s progressed, as it proved to be an effective tool for stabilizing both inflation and expectations. By clearly stating their inflation goals, central banks aim to align the public’s expectations with their policy actions, which increases the predictability and credibility of monetary policy.

A third factor that contributed to greater transparency in central bank communications was the pursuit of independence from political authorities. As the central bank gained more autonomy from governments, there was a corresponding increase in the demand for accountability. Communication became a central pillar in legitimizing the institution and monetary policy. This led to the need to explain decisions and their rationale to the public and political representatives. A dialogue that strongly brings together the technical and symbolic dimensions of an institution fundamental to the market and society.

In this context, as Galípolo rightly pointed out, more than science is required to achieve good public communication – it is also necessary to learn how to work with and through words.

Paulo Nassar

Leonardo Müller