Credibility Gains from Communicating with the Public: Evidence from the ECB’s new Monetary Policy Strategy

we fielded a set of special-purpose questions in the new Consumer Expectations Survey (CES). The CES is an online survey conducted by the ECB on a monthly basis among more than 10,000 consumers in the six largest euro area countries, i.e., Belgium, Germany, Spain, France, Italy and the Netherlands. The survey is representative of the national adult populations and covers a range of topics including economic expectations, income and consumption, labour and housing markets as well as consumer finance. Further details about the CES are provided in ECB (2021, ECB Consumer Expectations Survey: An overview and first evaluation. ECB Occasional Paper No. 287) and Georgarakos and Kenny (2022, Household spending and government support during the COVID-19 pandemic: Insights from a new consumer survey. Journal of Monetary Economics 129, S1-S14).

2021-09-01

2021-09-30

“How likely do you think it is that the ECB will maintain price stability in the euro area economy over the next 3 years?” Respondents could give any percentage between 0% and 100%.

How much higher or lower do you think prices in general will be 12 months from now in the country you currently live in?
By about what percentage do you expect prices in general in the country you currently live in to increase/decrease on average over the next 3 years?
How confident are you of your prediction about changes in prices in general on average over the next 3 years?

Likelihood that inflation expectations are between 1 and 3%
Binary confidence indicator that takes the value 1 if respondents report some confidence (i.e. answer ‘confident’ or ‘very confident’) about their medium-term inflation forecast and 0 otherwise

We randomly split the sample into five groups, stratified by country. The information treatment effects of interest are identified relative to a control group that completes the special-purpose survey without receiving any information about the ECB’s Strategy Review. In contrast, the four treatment groups got to read different parts of the Strategy Review-related communication that is available on the ECB’s website. The first type of information, which was provided to all four treatment groups, describes the ECB’s new inflation target as follows:
“The ECB aims for a 2% inflation target over the medium term as the best way to maintain price stability. The target is symmetric: inflation may sometimes be slightly above it or below. The ECB looks through short-term deviations. Persistent negative and positive deviations are regarded as equally undesirable.”
The other three treatment groups all received the above baseline information about the new symmetric target plus one additional element each. These additional elements had also been emphasised in the new framework. The second treatment group is additionally provided with a description of the function of the target that had been provided as a further explanation in the accompanying ECB press release:
“A target of 2% has an important function: it creates space so that monetary policy can have its stabilising effect. In bad times, such as during the pandemic, monetary policy stimulates the economy through low interest rates and so has significant favourable effects on economic growth and employment. This may also imply a transitory period in which inflation is moderately above the target of 2%.”
A third treatment group received the baseline description of the symmetric target, and in addition a statement on the ECB’s perspective on climate change:
“In addition, the ECB has acknowledged that climate change is an existential challenge for the world, and it is of strategic importance for the ECB’s mandate. As a result, the ECB has decided on a number of measures to account explicitly for the implications of climate change and the carbon transition in its new monetary policy strategy.”
The fourth treatment group received additionally a statement on the ECB’s intention to include housing costs in the measurement of inflation:
“In addition, the ECB has heard the calls of European citizens for a broader coverage of housing costs in the measurement of inflation and it will work towards making this possible.”

Random sample assignment into 5 groups, stratified by country and sample recruitment method (via probabilistic or existing panels)

Household

No

0

10000 consumers

2000 per treatment arm

We show that the announcement of the ECB’s Strategy Review and the revision of its inflation target in summer 2021 went largely unnoticed by the wider public. Although it is hard to reach out to this group, we find evidence that communicating key elements of the strategy can enhance the perceived credibility that price stability will be maintained in the medium-term. Randomised information treatments reveal that providing additional explanations about monetary policy’s stabilising role has the strongest positive impact on credibility, boosting credibility also among the less financially literate and generating more persistent credibility gains, even after inflation increased.

Michael Ehrmann, Dimitris Georgarakos and Geoff Kenny (2023). Credibility gains from communicating with the public: evidence from the ECB’s new monetary policy strategy. ECB Working Paper No. 2785

https://www.ecb.europa.eu/pub/pdf/scpwps/ecb.wp2785~0243b480bf.en.pdf?5d10a8e2fe31b207acd0000336674da8