Central Banking: When Communication is the Policy

“Sometimes, the explanation is the policy”

– Janet Yellen, Chair of the Federal Reserve 2014-2018

The psychological and behavioural economics literatures have had a transformative impact on how we understand people’s financial and personal decision-making. Studies have shown that more information isn’t always better, that defaulting people into saving can help them save more, and sending a letter to customers about the best tariffs for them can increase the chance of energy switching.

There has been relatively less research on how behavioural insights apply to macroeconomic policy – and in particular, monetary policy. Yet people’s beliefs and how they respond to policy decisions are crucial. Inflation targets are more likely to be effective if they are widely understood and credible. But only around a quarter of the public can typically correctly identify the correct range for current inflation, even when given a small number of options to choose from.

Poor comprehension of economic policy and low trust in economists and economic institutions can undermine economic stability and lead consumers to make worse personal finance decisions. The Bank of England’s Chief Economist, Andy Haldane, has diagnosed economics with a “twin deficit” problem comprising an “understanding deficit” and a “trust deficit.”

How can we communicate economic information?

The Bank of England and the Behavioural Insights Team (BIT) teamed up to test four different ways of communicating the Bank’s February 2018 Inflation Report summary and interest rate decision:

The Bank’s existing Monetary Policy Summary, typical of the content that central banks traditionally publish.

The Bank’s Visual Summary, brought in at the end of 2017. The new Visual Summary is designed to make the Bank’s inflation report more accessible, and contains simplified language and visuals.

A reduced text version of the current Visual Summary, drafted by the joint Bank/BIT team. This kept the same structure and main messages as the Visual Summary, but aimed to reduce informational complexity by reducing the amount of text – 535 words instead of 1069.

What we call a ‘Relatable summary’, designed by the joint Bank/BIT team, which restructured the information to make it clearer why the Bank took the decision it did; and made the content more ‘relatable’ to day-to-day lives. For example, explaining what a 2% inflation rate means for a basket of goods and services next year, as shown in the picture below. We drew on evidence that personalisation and making information relevant to individual circumstances can increase engagement (Garner 2005; Behavioural Insights Team, 2012), and that expressing costs in absolute terms (e.g. pound values) instead of relative terms (e.g. as percentage changes) can improve comprehension (Gigerenzer and Edwards 2003; Spiegelhalter 2017).

Central banking: when communication is the policy

We tested these four versions on BIT’s online experiment platform, Predictive, which allows us to run online randomised controlled trials. Respondents received one of the four versions, and had to answer a series of comprehension questions, and then some questions on trust and perceptions.

Our ‘relatable’ summary was the most effective in increasing comprehension and trust

The Relatable Summary increased comprehension scores by 42% compared to the traditional Monetary Policy Summary, and by around 13% compared to the Bank’s Visual Summary. These scores were based on a series of five questions designed to test direct comprehension of the material, for instance, testing whether readers understood how prices were changing.

Central banking: when communication is the policy

We also tested whether people could apply the information they had read about prices in two scenarios, one on budgeting for grocery shopping, and one on salary negotiation. We found that:

The Relatable Summary was the most effective in getting people to answer ‘correctly’ what a basket of groceries costing £100 should cost next year, more than doubling the proportion of correct responses compared to the Monetary Policy Summary.

The Relatable Summary was the most effective in getting people to answer ‘correctly’ how much a friend’s £100 daily salary should go up by to cover costs of living next year, increasing the proportion of correct answers by 15 percentage points compared to the Monetary Policy Summary.

The Relatable Summary also improved participants’ rating of the information for trustworthiness compared to the Monetary Policy Summary, and was the most effective at improving perceptions of the Bank.

What’s next?

We think our findings on the impact of relatability can usefully inform how central banks, other economic institutions and government communicate economic information to the public. It’s a first step on the way to integrating behavioural insights into macroeconomic policymaking.

But there’s also much more to do to improve public understanding of economics and trust in economic policymaking. Key questions we’d like to undertake further research on include:

Building on the concept of relatability: What specific aspects of ‘relatability’ make it so effective? In what other ways could ‘relatability’ be used to improve public understanding in economics and economic policymaking?

Communicating uncertainty: Can we extend this approach to better communicate uncertainty in economic forecasts and policymaking? Communicating uncertainty in a clear and simple way can be challenging, but ignoring uncertainty could undermine longer-term efforts to build trust and credibility.

Deepening public engagement: What techniques might help overcome biases in how people process economic information? For instance, can we design information to reduce possible confirmation biases – the tendency for people to seek out and evaluate information to suit their preconceptions?

Understanding the channels through which most people come across economic information: Perhaps most importantly, how do the media affect people’s understanding of economic news – and what does this mean for how institutions such as central banks should seek to improve public trust and understanding?

A version of this blog post was originally published on the BIT website. The full paper is available here: Enhancing central bank communications with behavioural insights.

Report authors: David Bholat (Bank of England), Nida Broughton (Behavioural Insights Team), Alice Parker (Bank of England), Janna Ter Meer (Behavioural Insights Team) and Eryk Walczak (Bank of England)