Money, Banks and Finance in Economic Thought

Central Banks as "Repositories of Experience and Knowledge"

Muchlinski Elke, Guest Professor Macroeconomy and European Economy at Berlin School of Economics and Law

According to modern economic history central banks are acknowledged as an innovative part of the maintenance of democratic society and institutions. Central banks as institutions »have become repositories of experience and knowledge which they communicate to society as a whole. (…) Institutions embody accumulated wisdom and experience« (King 2004). Long time ago also John Maynard Keynes emphasized the important function of central banks by stating that the Bank of England (BoE) should act as part of the society and functions as a centre for research, information, and advisory communication. » The more we get rid of unnecessary secrecy and mystery the more we can facilitate informed outside criticism« (Keynes 1930, C. W. XX, 262). Keynes wanted the Band of England (BoE) to step beyond its silence towards greater openness and transparency, providing relevant information and explaining its own considerations and future path to the public in order to stabilize the expectation-building within an uncertain economic landscape. Issing (2005a, b) and Woodford (2005) – among other authors in the current debate – pointed simultaneously to the central bank’s task ‘steering market expectations’. The turning point of central banking towards transparency, accountability and communication since the late 1990s also implies that central banks use different modes of language in order to improve the coherence of understanding with the market and the central bank. Today central banks are faces with crucial challenges: the independence and autonomy of central banks need to be protected and defended (Borio 2012). A comprehensive challenge will be to manage market expectations, recognising the limitations of monetary policy as a tool to manage the economy. However, the expectation-building process of heterogeneous market participants is neither a linearly determined nor a causal response to stimuli or to disclosed information. Economics is not based on causality as is typical for mechanical stimulus-responses. Understanding of the minutes or a press release – should not be confused with its publication. Understanding as a judgment at hand, does not follow procedures of decoding or a cybernetic exchange of information and a given meaning. Any judgment is an attempt to come to terms with a problem or event. Understanding is an ability to participate in circumstances differently. This implies a participation in a shared practice and encompasses the knowledge, experience and the history of institutions (Muchlinski 2012). »Understanding in economics does not proceed cumulatively« (Borio, 2012, 7). Consequently a central bank will earn credibility by ‘matching deeds to words‘ (Blinder 1998) but not by creating an artificial language that is not rooted in central bank practice itself (Muchlinski 2011). Shin (2017, 6) emphasises that communication of central banks is »a two-way-street« which also requires to balance talking and listening. Haldane (2017) explains why communicat

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Keywords: central banks, Keynes

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