Based on a social and psychological science framework of narratives and uncertainty not fully formulated, we proposed to the Bank of England’s Chief Economist a pilot study to explore the work of the Bank of England’s Agents. How did the information they obtain about the business plans of businesses interact with the other thinking and data available to officials implementing the Bank’s monetary decision-making policy cycle?

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The “Agents” it had seemed to us practiced a sort of anthropological fieldwork: a type of inquiry that is keenly sensitive to changing contextual information and, above all, to the insights, interpretations, and explanations of economic actors themselves. We hypothesised that the information they obtained might be fine-tuned to increase its potential value to the MPC and even to improve monetary policy.

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Methods

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To investigate such thoughts in a preliminary way, we were eventually housed in the Bank as Academic visitors and permitted to observe several types of interactions and to talking to people from among three groups of actors involved in the way the Bank of England creates monetary policy at eight meetings a year.

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1. Nine Monetary Policy Committee (MPC) members. Appointed by Government for finite terms, they are responsible for achieving the 2% inflation target set by law backed by their power to adjust interest rates. They each vote independently and transparently to set rates, agree minutes providing their reasoning, give speeches, attend the House of Commons Treasury Committee to justify their actions and four times a year agree a Monetary Policy Report.

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2. Twelve Regional Agents and their deputies (the Agents). The Agencies produce 10-11 Agents’ Economic Reports (AERs) ahead of each MPC meeting which form the basis of an Agents’ National Summary (ANS). They are also responsible for targeted surveys of opinion among their contacts, planned in consultations after the previous MPC meeting. The ANS, and the outcomes of surveys, are published eight times a year alongside the MPC minutes, either in the Monetary Policy Report or as a quarterly Agents’ Summary of Business Conditions (ASBC). These include indicative, numerical scores summarising directions of change over key national economic variables drawn from Agents’ visits to their contacts (Agents’ scores).

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3. The Agency’s Business Contacts in the regions (contacts). Nine thousand business, local authority and civil society contacts are each visited by the Agencies once a year, spread out through each MPC cycle. The contacts are in senior positions in UK firms and other organizations, including in the public and third sectors and often, but not always, well known to the Agency from relationships built up over previous visits. Each visit lasts an hour, is confidential, may sometimes include survey questions, and will cover general topics related to wages, employment, sales, output, profits and investment over the preceding year and business plans going forward. The Agents also answer contacts’ questions and explain the MPC’s current thinking.

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Preliminary Findings

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Monetary Policy pursued by an inflation-targeting central bank, loosely based on macroeconomic theorems about the role of forward-looking expectations in an economy, is one of the main policy tools currently used to make an economy work better for all. For the last thirty years central banks, given independent powers to deploy various monetary instruments, have developed it. In doing so, they have imaginatively developed analytic and communication skills and practices that are outside the scope of standard academic economic theory and may even conflict with it. One set of new skills concerns ways to resolve significant uncertainties about what is happening in an economy at a given moment and how it is going to evolve. A second set of skills concerns communication to their publics. The logic of inflation targeting is that although policy is made by central banks it is necessarily market participants and the public that actually have to do the work (Holmes, 2014; 2018), which means that communication as a policy lever must be legible, based on accurate assessments of what is happening and reputable. 2008 and the period since has jolted confidence in whether central banks have such skills.

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In the planned paper, we explore, in a preliminary way, how existing theory underlying the practice of monetary policy might be augmented and the practice of monetary policy better understood, if we term “radical” uncertainty is foregrounded as a central issue, and, also if ideas about what constitutes knowledge in real-world contexts is approached through the lens of ideas from social and psychological science.

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For shorthand, we refer to such a framework as a Narrative Theory of Monetary Policy. It aims to extend the existing thinking that supports monetary policy by highlighting the challenges for data selection and analysis with which an inflation targeting central bank must cope, if uncertainty about data is explicitly factored into the implementation task. And on the policy action side, it aims to add coherence to the debates policy makers may have in policy formation and to the explanatory and communication elements in monetary policy.

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To develop our Narrative Theory of monetary policy, the paper is set out as follows. First, we introduce the concept of narrative from a social and psychological perspective, emphasising the theoretical role narratives play in generating actionable knowledge in conditions of (Radical) uncertainty. Second, we summarise some key elements of Holmes’ (2014) work on narratives and the expanding communication imperative in central banks. Third, we describe aspects of our pilot study “conversing with and observing” staff who collect data and generate monetary policy at the Bank of England. Fourth, we offer some initial findings from the pilot to suggest that, framed within Narrative Theory, the data that members of the Bank’s Agency Network (the “Agents”) collect is uniquely useful in two important ways: first, as a source of valuable information for analysis and understanding of the need for policy action at any one moment; and second, as a source of guidance relevant to policy communication elements.

 

Our findings suggest that a wider appreciation of the foundational elements in Narrative Theory, in the context of further experimentation, might remove some current “epistemic tensions” caused by unrecognised assumptions in economic theory framed frameworks and improve both the analysis and communication that a modern inflation-targeting central bank needs to employ. It might help to leverage productively Agency networks such as those the Bank of England already has.

After several presentations in academic and central banking contexts, we have submitted the paper to the Bank of England’s Staff Working Paper series, where we hope it will soon be available.