What factors are the most significant in the transmission of information?

Nguyen Tu Anh, director general of the Department of General Economic Issues under the Central Economic Commission

The credibility and reliability of information is measured by several factors: given information must be accurate, unambiguous, and released fairly. If the information has low reliability, then it will not be meaningful in decision-making by the market.

However, as no-one can be sure what will happen in the future, especially in the financial markets, central banks rarely make specific commitments about what they will do in the future.

If central banks provide information that is only general, with no clear trend, that information is not wrong but also has no value in decision-making. Hence, communication in operating financial markets is an art.

The information must be valuable enough to help shape the market expectations, yet not too specific to create room for the regulator to make timely adjustments fitting the market’s actual movements in later periods.

Central bank information will often be absorbed and valued by the market in asset prices, and this valuation allows them to monitor and evaluate the impact of the proposed policy.

If the impact aligns with the expectations of the management agency, final policy decisions will be made to realise those expectations. As the impact of the policy has been absorbed by the market before, it will not cause any significant shock in the market.

Should central banks use the media as a tool for monetary policy management?

Monetary policies do not cast a direct impact on management objectives, but they do for some intermediate objectives. For example, to mitigate inflation, they won’t directly affect commodity prices, yet they will use monetary policy to make the cost of commercial banks more expensive, from there easing the money supply, which will in turn bring down inflationary pressures.

The efficiency of monetary policy depends on the transmission mechanism efficiency, which can only be achieved when most of the market responds to the wishes of the regulator in the same direction.

If the market does not clearly understand the policy direction, and each person reacts in different ways, that will neutralise the effect of the policy.

For example, if the market is uncertain about a central bank’s assessment of current inflationary pressures, some people might think that inflationary pressure is high, and they could raise interest rates. They will then actively mobilise capital when interest rates are low.

On the contrary, some people think that inflation is not a concern, and the bank may loosen monetary policy and lower interest rates. This will limit raising and bolster current lending. These mixed reactions will nullify monetary policies both in combating inflation and in aiding the aggregate demand.

In addition, before being enacted, policies need to explore how the market will be affected to adjust the impact of the policy. The transmission of information needs to assure it puts out the market expectations in an orderly fashion. Shocks only occur when it is impossible to predict what’s going to happen in the market, but when oriented carefully, the market will react along with the expectation, avoiding a shock.

In the financial system, information is deemed an asset. Do you agree?

Experiences in countries around the world show that if someone grasps the information first, especially decisive information, that person will easily catch profit from this, and vice versa.

To ensure fair competition, important policy decisions are made by a council, yet can’t be decided by a single individual. This is to ensure openness, accountability and to make sure that no one can manipulate the decision.

The decision-making mechanism of the council and the active participation of the media are crucial to ensure that everyone has equal access to information, and that no one can profit from an information monopoly.

How can we bolster the efficiency of information transformation?

The central bank often makes periodic comments and assessments on the macroeconomic and market situation, especially on variables under its control, such as inflation, employment, and growth. Reports need to honestly reflect their judgments and assessments, thereby helping the market to form expectations about its policy trend.

For example, if it assumes that inflation is likely to rise sharply in the near future, it will administer a tighter monetary policy. If economic growth shows signs of decline, it will be likely that monetary policy will be loosened in the near future. The more assessments the central bank makes, the more bases the market has for pricing these forecasts into asset prices.

A central bank should not surprise the market through policy management that does not meet expectations. Instead, it needs to try to direct and smooth market expectations.