Central Banks and Coded Language

This book is concerned with the new paradigm of central banking. In a democratic society, transparency and accountability are not optional, but are required of independent central banks. The independence of modern central banks does not infer that central banks exist independently of structures in society or of the interactions between various agents in the financial markets (Cukierman 2008; de Haan, Masciandaro, and Quintyn 2008). A feature of the new paradigm is the interactive dimension of central banking and the financial markets. ‘Monetary policy works through the market, so perceptions of likely market reactions must be relevant to policy formation and actual market reactions must be relevant to the time and magnitude of monetary policy effects. There is no escaping this’ (Blinder 1998, 60).

Discourse on central bank transparency and communication has been moving beyond the silence of a black-box mechanism. It has initiated a theoretical upheaval on modern central bank theory. This is also true for the areas of research related to a central bank’s interactive procedures touching its market interdependencies and relations. The focus on the central bank’s way of acting, on the use of language and modes of communicative interactions, has also been drawing much attention.

In this chapter I want to move towards a workable definition of communicative interaction between the central bank and financial markets. This chapter deals with a comprehensive view of communication. Communication is not a linear transformation of information, hence not a linear transformation of a given meaning from a sender to a receiver. The release of information by a central bank implies the creation of non-linear communication structures. I want to propose a nonlinear conceptual framework for central banking and communicative interactions. Since communication is based on interaction between at least two persons or institutions, this interaction contains different modes of perceiving, and processing of, information and, also, understanding. The conceptual framework introduces communication as a procedure of information processing, interactions among people and institutions in different contexts. It excludes the view that communication is based on coded language or mechanical adaptations as described by the standard model of communication.¹

This chapter discusses a relatively small range of contributions addressing the combined fields of economics, communications, and language.¹ Language is a constituent for scholarly work in economics. Language is used to build and develop certain research tools, methods, and instruments in different realms of economic science. Despite the focus of this book being on central banking, I would like to shed light on the question of how economists have been working on language. Economists are not used to systematically reflecting on their use of language. This chapter presents an overview of how economic sciences have dealt with communication, and it outlines an example of how central bank modelling has been influenced by the acknowledgement of the constitutive roles played by language and changing contexts, that is, by stepping out of the model view.

In this chapter I would like to provide an introduction to language as opposed to a coded language. This chapter tries to show why understanding matters to central banking. According to modern central bank literature, the genuine task of a central bank is to steer market expectations. Since expectations and the expectation-building process are not to be regarded as mental states but rather as articulations (utterances) configured by language-based interactions in different circumstances, central bank talks matter. However, expectations are neither linearly determined causal responses to stimuli nor causal connections to disclosed information. Economics, as a social science and as institutionalized procedure, is not based on causality as is typical for mechanical stimulus-responses. This is also true regarding understanding.

Following recent scientific research, I have attempted to achieve four considerations concerning the implications and consequences of the new paradigm of central banking. I have drawn a clear distinction between a central bank’s communicative interaction, hence the meaning of communication which is the key issue, and the implementation of a particular monetary policy, which is secondary.