Central banks’ communication as reputation management: How the Fed talks under uncertainty

Published date01 September 2019
AuthorLuca Pinto,Manuela Moschella
Date01 September 2019
Central bankscommunication as reputation
management: How the Fed talks under uncertainty
Manuela Moschella
| Luca Pinto
Department of Political and Social Sciences,
Scuola Normale Superiore, Pisa, Italy
Department of Political and Social Sciences,
University of Bologna, Bologna, Italy
Manuela Moschella, Department of Political
and Social Sciences, Scuola Normale Superiore,
Palazzo Strozzi, Piazza degli Strozzi, Florence,
53100, Italy.
Email: manuela.moschella@sns.it
Funding information
Financial support for this article was provided
by the Italian Ministry of Education, University
and Research (SIR Grant 2014 Unconventional
Central Banks: Making Monetary Policy in
Hard Times, RBSI14KCWY).
This article advances a reputation-based account to explain the rela-
tive salience that different issues assume in central bankscommuni-
cation. Based on an innovative dataset consisting of a corpus of
speeches by the members of the Board of Governors of the Federal
Reserve System of the United States (also known as the Fed) deliv-
ered from 2006 to 2016, the analysis shows that the most salient
issues in the Feds communication are shaped by reputational con-
cerns about policy reversals. Specifically, when these concerns are
higher, the Fed is more likely to focus on issues related to areas where
its reputation is weak or not yet establishedthat is, issues related to
credit easing and systemic financial regulation. In contrast, issues
related to activities where the Feds reputation is established are likely
to become less salientthat is, issues related to economic activity and
inflation. A similar pattern of issueattentionisobservedwhenthe
Fed addresses political audiences compared to other audiences.
The carefully chosen words of central banks have long attracted scholarly attention, and even more so since the start
of the recent global financial crisis. As financial markets entered a tailspin and economic activity collapsed, central
bankscommunication became particularly important to boost confidence and restore the conditions for economic
growth (de Haan 2013).
The importance of regulatory communication is not new to scholars of public administration, and research on
this particular aspect of organizational behaviour has made recent advances through the application of a reputation-
based approach (Maor et al. 2013; Gilad et al. 2015). A key insight of this scholarship is that agencies craft their rhe-
toric in order to increase their popularity and protect themselves from audience-based pressures. Reputational risks
have clear consequences for the way in which agencies communicate.
This article builds on this scholarship in order to explain the communication output of the most powerful central
bank in the group of advanced economies: the Federal Reserve System of the United States (also known as the Fed).
Specifically, we built an innovative dataset consisting of a corpus of speeches delivered by the members of the Fed-
eral Board of Governors from 2006 to 2016 to shed light on the content of central bank communication. Our
Received: 19 February 2018 Revised: 12 July 2018 Accepted: 17 July 2018
DOI: 10.1111/padm.12543
This is an open access article under the terms of the Creative Commons Attribution-NonCommercial-NoDerivs License, which
permits use and distribution in any medium, provided the original work is properly cited, the use is non-commercial and no
modifications or adaptations are made.
© 2018 The Authors. Public Administration published by John Wiley & Sons Ltd.
Public Administration. 2019;97:513529. wileyonlinelibrary.com/journal/padm 513
reputational argument is based on the observation that agencies face reputational costs for future policy reversals
(Carpenter 2010b; Carpenter and Krause 2012, p. 29), and their communication is thus strategically oriented to mini-
mize those costs. Since reputational risks are higher if policy reversals undermine the agencys unique reputation
(Carpenter 2001, p. 5; Carpenter 2010b, pp. 33, 45) or primary organizational mission(Maor 2010, p. 134), we
expect communication to be oriented away from issues related to the Feds distinctive reputation when the agency
acts in an environment that raises the prospect of future policy reversalsnamely, under conditions of uncertainty.
Under these conditions, issues related to weak or evolving reputation will gain more salience because the potential
reputational costs of policy reversals are comparatively lower. We also expect the agencys communication to be dif-
ferentiated across audiences, with comparatively more emphasis on issues related to the Feds evolving reputation
when political audiences are addressed.
While building on the existing reputational literature, the article also advances it in two important respects. First,
most existing scholarship models communication as a response to negative media coverage regarding specific dimen-
sions of bureaucratic reputation (Maor et al. 2013; Gilad et al. 2015). This article complements this scholarship by
showing that agencies craft their communication not only to address specific allegations but also to manage uncer-
tainty in their operating environment (Krause 2003). Second, we argue and illustrate that regulatory communication
is as much about degrees as types. That is to say, public agencies strategically choose not just a type of communica-
tion outputbe it silence, talk or a particular presentational strategy(Hood 2011; Gilad et al. 2015)they also stra-
tegically choose the salience attributed to one specific topic compared to another.
Although our contribution is based on a single case study, we apply an innovative method to study the content
of agenciescommunication that is easily replicable in other analyses. Specifically, we use structural topic models
(Roberts et al. 2014; Roberts et al. 2016) to identify inductively the issues central banks focus on in their external
communication and to gauge the prevalence of different issues as a function of reputational concerns. Furthermore,
the case analysed here is particularly important for the study of central bankscommunication because of the leading
role of the Fed in the community of central banks especially at times of market instability (Broz 2015). The Feds case
is also particularly interesting because important changes have occurred to the Feds communication policy over the
past two decades (Schonhardt-Bailey 2013).
Before proceeding, some clarifications are in order regarding the empirical evidence used in this article.
Although the empirical analysis that follows is based on the examination of public speeches by high-level offi-
cials, speeches do not exhaust the list of communication outputs produced by the Fed and central banks at large.
Central banks communicate with their audiences (market participants, households and firms, policy-makers and
the public at large) through a variety of channels, including research papers, publications of the minutes of mone-
tary policy decisions, and of inflation forecasts. In this article, we focus only on speeches because their format
offers a number of advantages for the purposes of the analysis. First, speeches are addressed to multiple audi-
ences, and their format is much less constrained than are other official documents. Second, speeches are strate-
gically delivered; that is, Fed Board members generally choose what audiences to address and what to say.
Furthermore, the speeches delivered by Fed Board members offer a unique opportunity to observe reputation-
protection behaviour, as this behaviour is usually more common among higher officials within an organization
(Carpenter 2010b, p. 67).
The article is organized as follows. The following section provides the tenets of a reputation-based analytical
framework to explain issue salience in central bankscommunication. The next section reviews the Feds organiza-
tional missions and distinct reputations. The subsequent two sections discuss data and methods and provide the
empirical test of our arguments. The last section presents the articles conclusions and implications.
Of course, central banks are required to address their political principals as part of their accountability requiremen ts. Beyond that,
however, they are still free to choose what other audiences to speak to.

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