Entrepreneurship, knowledge and employment

Keynes on 'steering market expectations' or why central banking is not the same as 'driving a car'

Muchlinski Elke, Professor at Berlin School of Business and Law

We can find remarkable passages in Keynes’s writings which demonstrate his approach to knowledge and decision-making under uncertainty. In Keynes’s works, decision-making under uncertainty implies judgement based on rational grounds in changing environments. Thus, individual judgement in market interactions should not be restricted to logical symbols but to actual langue and communication. Keynes explains decision-making by linking it to common understanding and a successful communicative interaction between a central bank and the public. It is important to anchor the expectation-building in language interactions with the markets. In line with Keynes’ view, current scientific contributions emphasize the need for communication, transparency and accountability. Since the financial crisis in 2007-08 the literature on central banking has intensified its direction towards language interactions with the public by integrating particular expressions into its terminology, e.g. ‘forward guidance’. Forward guidance has been designed to affect the public expectations and to change uncertainty in decision-making in order support the investor's decision-making and to mitigate the uncertain environment the volatility of short-term interest rates and hence to anchor the long-term interest rate according to the mandate of maintaining price stability. Central banks use different modes of language in order to improve the coherence of expectations and understanding between the market participants and the central bank. These modes have been moved beyond the former predominantly pure and formal language approach. According to Keynes’ view, ‘steering market expec-tations’ requires interpreting the expectations as an articulation configured by the language-based interactions in different situations.

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Keywords: decision-making under uncertainty, central bank's policy and investor's environment

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