Not so long ago, secrecy was the watchword in central banking circles. Now, the unmistakable trend is towards greater openness and transparency. Increasingly, the central banks of the world are trying to make themselves understood rather than leaving their thinking shrouded in mystery. A new CEPR Report, published jointly with the International Center for Monetary and Banking Studies (ICMB) in Geneva, describes and evaluates how central banks talk to the markets, the press and the public.

The case for transparency is very strong, the Report argues: it is based on both policy effectiveness and democratic accountability. Monetary policy is more effective when the central bank is better able to condition the market expectations that are so critical to the transmission of monetary policy. And transparency and accountability go hand in hand with central bank independence – a kind of exchange for the broad grant of authority.

The essential message that any central bank must convey to the public is its policy regime: what it is trying to achieve; how it goes about doing so; and its probable reactions to likely contingencies. Of course, no central bank can spell out in advance its reaction to every conceivable contingency; nor is it necessary to reveal every detail of its operations. Two guiding principles apply:

• First, the bank should reveal enough about its analysis, actions and internal deliberations for interested observers to see the logic behind each policy decision.

• Second, the burden of proof should be on those who would withhold information. There are valid reasons for secrecy but it should be the exception, not the rule.

What should central banks talk about? First, they need to spell out their long-run objectives clearly. This is a simple task for banks with a single target, such as the inflation rate or the exchange rate, a more difficult one for central banks with multiple goals. But they should articulate their aims as best they can. Central banks should also reveal a great deal about their methods, including their forecasts, the models used to derive them and to explore alternative policies, and the precise methods for implementing policy changes.

The Report recommends that central banks reveal at least the broad contours of their forecasts as often as they are made. This runs counter to the old conventional wisdom that central banks should never give ‘forward-looking’ information. Should the central bank publish a conditional forecast predicated on unchanged monetary policy, or base its published forecast on its actual projections of future monetary policy changes? The authors’ pragmatic view is to acknowledge that central banks typically do not formulate explicit plans for future monetary policy, and so cannot reveal future policy changes.

Central banks should provide more information about their internal models than they have historically done. But most central bank watchers only care about the bank’s basic view of how the economy works, so well chosen words supplemented by a few key numbers may suffice.

When they intervene in foreign exchange markets, central banks almost always try to catch market participants by surprise, and they rarely reveal how and when sterilized interventions have taken place. Lack of sufficient ammunition – foreign exchange reserves – to affect market behaviour can justify this departure from transparency, according to the Report.

In contrast, all decisions about domestic monetary policy should be publicly announced as soon as they are made, with no informational advantage to select ‘insiders’. Central banks should also provide indications about their tentative future plans, perhaps through statements about which way they are ‘leaning’.

The precise ways in which a central bank communicates will vary depending on whether monetary policy decisions are made by a single individual or, as is increasingly the norm, by a committee. If decisions are made by a committee, the communications strategy will also vary depending on whether decisions are presented as achieved by consensus – a collegial committee – or by individuals voting their own preferences – an individualistic committee.

Policy decisions are usually announced with a brief statement. In the case of a single decision-maker, the statement should explain the reasoning behind the decision. A highly individualistic committee may find it difficult to agree quickly on a statement, but in this case, detailed minutes – including the vote – should be released as soon as possible. In collegial committees, there is room for choosing how much to explain immediately (in the statement) or later (in the minutes).

Conflicting signals emitted by committees confuse markets and get in the way of transparency. Committees must strive to convey a consistent message even though the transparency of individualistic committees means that differences of opinion are inevitably aired in public.

So how do central banks actually talk? The Report concludes with a review of the communications strategies of some of the most prominent central banks:

• The US Federal Reserve has changed its communications policies dramatically since 1993, and while perhaps still lagging behind other central banks, it is clearly moving toward greater transparency. The Report recommends that the Fed states its objectives more clearly, publishes its forecasts and clarifies their nature, and offers fuller statements to explain its policy decisions.

• The European Central Bank’s (ECB) much criticized communications policy is complicated by the short history of the Bank, its multinational nature and its confusing ‘two pillar’ monetary strategy. Nonetheless, it is already more transparent than the Bundesbank ever was. The Report recommends that the ECB clarifies the time horizon for its inflation target, improves its published forecasts and publishes minutes.

• Having been granted independence in 1998, the Bank of Japan (BOJ) has become much more open than it used to be. The Report recommends that the BOJ clarifies its inflation objective and provides a better explanation of the reserve-targeting policy regime that it adopted earlier this year.

• The Bank of England adopted inflation targeting in 1992 and became independent in 1997. Both events led to dramatic increases in transparency, which, by now, place the Bank near the vanguard. The Report recommends that the Monetary Policy Committee issues a statement immediately after each meeting and tries to limit the multiplicity of alternative viewpoints.

• The Reserve Bank of New Zealand has been leading in central bank transparency since its 1989 reform. It now even publicly projects its own future behaviour. The Report can recommend no further steps to improve transparency.