Can the ECB gain credibility by explaining its strategy?

August 24, 2022

By Michael Ehrmann, Dimitris Georgarakos and Geoff Kenny

Communication with the general public is important for monetary policy. Although it is difficult for central banks to reach the general public, recent research shows that explaining the ECB’s inflation target and strategy to consumers can boost its credibility.

The ECB clarified its inflation target as part of its strategy review in 2021. Despite the ECB’s efforts to communicate the results, the vast majority of the general public remains unaware of the new inflation target. What if the ECB had been able to communicate the results of its new strategy more effectively to the public? We were curious whether explaining the ECB’s inflation target and strategy would help boost the ECB’s credibility. So we asked consumers. This blog post describes the research results from this study.

Consumers are often unaware of the new inflation target

Communicating with non-experts is important for central banks, especially in the current environment of high inflation rates. Decisions about household consumption and investment are made by the general public, and these decisions are of crucial importance for economic development. But non-experts are hard to reach. When we asked in September 2021, as part of the ECB’s Consumer Expectations Survey (CES), whether consumers had heard of the ECB over the summer (when the ECB announced its new strategy), the majority of respondents said they did not.[1] And of those who had heard of the ECB, most could not remember what they had heard, so only around 10% of consumers said they had heard of a new strategy.

The ECB changed its strategy and inflation target, but failed to get the message across to Eurozone consumers. What if the message had reached the general public? Would this have affected the credibility of the ECB, and what type of information would have been useful in this respect? To answer these questions, again using the same CES wave in September 2021, respondents were given different “information treatments” – to use the analogy of a medical trial.[2] We grouped the respondents into five groups. The first, the “control group,” received no information treatment (similar to a group that receives placebos in a clinical trial). The other four groups received different treatments. The second group was told that the ECB is aiming for a 2% inflation target which is symmetric, meaning that the ECB considers negative and positive deviations from the target to be equally undesirable, but also that the inflation can sometimes be slightly higher or lower than the target. We treated the third group in the same way, but we also gave them more economic context, explaining how an inflation target helps stabilize the economy and contributes to economic growth and employment. Like the second group, groups four and five only received the basic information on the inflation target, without the economic explanation. However, everyone was given an additional concept to consider, which they could easily identify with and which appears in the new ECB strategy. Group Four was briefed on the role of climate change and Group Five on the ECB’s plan to better take housing costs into account when measuring inflation.

Strengthen the credibility of the ECB with non-experts

If information reaches consumers, what difference can it make? After the various information treatments, all survey respondents were asked to indicate the likelihood of the ECB maintaining price stability in the euro area over the next three years. The blue bars in the graph show the immediate effect of the treatments, compared to the control group which received no information. The graph shows that credibility is enhanced for all groups, and even more so for the group that received the most contextual information. For this group, the perceived likelihood that the ECB will achieve price stability over the next three years increases significantly, by 4.5 percentage points.

Later, in December 2021 and March 2022, we tested whether the news processing of September 2021 had left its mark yet, so we again asked the same question about the credibility of the ECB. The orange and gray bars in the graph show that the effect of information processing has effectively disappeared – except for the group which benefited from a more complete explanation. For this group, credibility is heightened even in March 2022, when eurozone inflation had already started to pick up noticeably. This illustrates how effective it can be to explain monetary policy. This conclusion is also supported by more detailed survey results: credibility with consumers with low levels of financial literacy was only gained if they had received the contextual explanation.

Providing people with information about monetary policy is important to be more inclusive and to generate more lasting effects on credibility. The research discussed in this blog shows that the ECB’s efforts to better understand its monetary policy strategy can boost public confidence. As part of its strategy, the ECB will continue to reach a wider audience through a wide range of traditional and online communication channels. For example, the ECB publishes explainers and podcasts on its website and promotes information on central bank-related topics via social media to engage with eurozone citizens.[3]

Chart 1

Credibility gains from different information processing.

Percentage point gains

Notes: The graph captures the effect of different treatment of information (compared to the control group that received no information) on the credibility attributed to the ECB (measured as the likelihood that the ECB will maintain stability prices in the euro area over the next few years). 3 years). All the estimates of coefficients referring to credibility measured in September 2021 are statistically significant at the 1% level. The estimates of the coefficients referring to credibility measured in December 2021 and March 2022 are indicated in dark orange/red if they are statistically significant at least at the 10% level, and in light orange/red otherwise.
Source: Ehrmann, Georgarakos and Kenny (2022).

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