Let's Not Return to the Bad Old Days of Central Bank Secrecy

Certainly there are downsides to communicating lots. But we know too well the harm of strategic leaks.

If these walls could talk...

Photographer: Stefan Wermuth/Bloomberg

Central banks should be less transparent.

It's an idea worth considering, even if flawed. One important byproduct of the 2007-2009 disaster was greater scrutiny of monetary policy and increased pressure on practitioners to explain what they were doing. If a government agency is going to engage in unorthodox activities like buying government bonds, officials better be prepared to present their reasons.

Investors in fact have come to count on that transparency. But has it helped the officials to do their job? Has the panoply of communication tools such as press conferences, forward guidance and projections actually improved forecasting and guided decision making in the economy?

That's an important question posed in a working paper from the Swiss National Bank late last year. A version of the piece by one of the bank's economists and one of its economic advisers, Thomas Lustenberger and Enzo Rossi, appeared this month through the Center for European Economic Research.

Given their work for a central bank, one might have expected them to say that the wave of openness has benefited policy. On the contrary, they say greater openness hinders effectiveness. Information conveyed in private is far more precise than what is in the public domain.

That's entirely plausible and at least partly accounts for the growth of firms and consultants offering what might be called central bank intelligence or high-powered analysis of public information by former central bank employees.

Is it good policy, and can it be justified politically? The Federal Reserve, for example, is a creature of Congress. The European Central Bank is a child of the drive for greater European integration that followed the Cold War. Barely a week goes past without top representatives of the Bank of Japan popping up in the legislature.

That leads to another stunner from Lustenberger and Rossi: Central bank independence from political processes leads to worse, not better, forecasts. True, autonomy is a lot more nuanced than widely believed, and depends on politicians' willingness to accept outcomes -- or their appetite to be accountable for a new setup. (Congress loves to have someone else to blame.)

Independence has added to the number and profile of officials setting policy, which in turn gives rise to a "cacophony" of voices clamoring for attention or defending their votes, the argument goes. That makes it tough for the public to figure out what the core policy is and who, exactly, to listen to.

That's fair enough on one level, but not so much on closer inspection. If voting records are published, and someone is a chronic dissenter, then people ought to know to take their opinions with a dose of salt.

For too long central banks kept too many secrets. They would be ill-advised to return to a sepia-tinged era when an oblique aside in parliamentary testimony is an earth-shattering moment. Or when insight depended on selected leaks to a favored scribe, dished out only on condition it's written a certain way. The public, in whose name policy is conducted, wouldn't be well served.

Lustenberger and Rossi are right to push the envelope. Every assumption can use a workover now and then. But as central banks ponder during these sunny economic days what they can do differently, let's not retire openness.

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

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