The role of central banks in economic and personal finance education

Speech by Jürgen Stark, Member of the Executive Board of the ECB
at the International conference of central bankers and economic educators
Warsaw, 29 September 2006

Ladies and Gentlemen,

It is a pleasure to conclude this conference and I would like to thank the organisers, Narodowy Bank Polski, and its President, Leszek Balcerowicz, for their invitation. The contributions to this conference have shown that central banks around the world devote significant resources to fostering economic education and literacy.

The rapid advances in information technologies and the globalisation of our economies have led to a significant transformation of the economic landscape in recent years. In such a fast-changing and complex world, economic literacy is becoming increasingly important in order to enable citizens to efficiently participate in the society in which they live. Thus, economic literacy is of prime importance for the functioning of our societies.

Beyond that, economic literacy is crucial for economic efficiency, the conduct of economic policy and thus welfare. I would like to highlight two channels through which economic literacy works:

By fostering prudent policies and economic efficiency, economic education also indirectly facilitates the conduct and effectiveness of monetary policy. The establishment of competitive and flexible markets, adequate wage settlements and sustainable public finances are essential for monetary policy to achieve its objective.

There is also an important direct impact of economic and financial education on monetary policy. High standards of economic education help to build public support for the pursuit of price stability as the ultimate goal of prudent monetary policy. Over and above legal provisions, it is of the utmost importance for a central bank that a “culture of stability” emerges in society, supporting the task of the central bank.

If people know that price stability:

then people will accept that safeguarding price stability is the appropriate goal of monetary policy and the best contribution which monetary policy can make to economic efficiency and welfare.

However, as you have noticed, explaining these benefits of price stability requires reference to a number of basic economic concepts, such as the link between inflation and longer-term interest rates. This shows the need for basic economic literacy in order to understand what “prudent monetary policy” is and follow and participate in informed discussions about the basic principles of monetary policy.

Furthermore, it is important that the general public understand that an independent central bank is the best way to achieve price stability.

History has shown that central bank independence is one, if not the most important, precondition for a monetary policy that gives priority to the objective of price stability. Central bank independence can, in broad terms, be defined as institutional independence, requiring legal provisions that guarantee that the central bank can carry out its tasks and duties without political or any other form of interference. Furthermore, to underpin its institutional independence, a central bank also needs to be given functional, personal and financial independence. Functional independence implies that the central bank can apply its own judgement in the conduct of monetary policy with the aim of achieving the objective specified in its mandate. A key element of a central bank’s functional independence is its lasting control over the money base and its ability to freely choose the instruments which it uses to implement its policies. Another important element is a definitive prohibition of monetary financing of budget deficits. Personal independence means that the board members and staff of a central bank are personally protected from political pressure and influence. Key provisions in this respect include predefined terms of office for the members of the governing body. Finally, financial independence, which refers to a central bank’s autonomy over its financial resources and income, is a key factor in that it helps the central bank to perform its functions efficiently, thereby contributing to its credibility.

Article 108 of the EC Treaty grants the ECB far-reaching independence in all of these four areas. The Treaty explicitly stipulates that, when exercising their powers, neither the ECB nor any member of its decision-making bodies may seek or take instructions from Community institutions or bodies, from any government of a Member State or from any other body. The Treaty further states that the Community institutions and bodies and the governments of the Member States must respect this principle and must not seek to influence the members of the decision-making bodies of the ECB.

Central Bank independence is nowadays enshrined in many central bank laws and statutes around the world. In order to ensure that this achievement also prevails in the future, broad public awareness of the benefits of central bank independence is essential. Fostering and preserving such awareness requires, in particular, that the independence of a central bank, once granted, is respected by the government in question and not undermined by political interference.

Thus, economic literacy is a key factor in helping independent central banks to deliver the “public good” of price stability.

Beyond this, economic education also matters for the effectiveness of the conduct of monetary policy. By improving people’s ability to process economic information and make more efficient economic decisions, it enhances economic efficiency. This, in turn, increases the effectiveness of monetary policy. For example, if people are better able to assess and compare financial products, they will make more efficient financial choices. This fosters competition and overall efficiency in the financial sector and hence increases the effectiveness of the transmission of a change in policy rates via the broad range of interest rates and asset prices which are relevant for financing, saving and investment decisions.

Via an effective working of the monetary transmission mechanism economic literacy also contributes indirectly to economic and financial stability. Moreover, there is also a direct impact on economic and financial stability. Economic education enables consumers to better understand the current fundamental state of their lifetime resources, the fundamental value of assets, and the risks which they face. This should help to prevent herd behaviour, asset price bubbles and the development of imbalances in the financial sector, thereby reducing uncertainty and volatility in financial markets and facilitating the conduct of monetary policy. For example, economic education will help to ensure that rising risk premia in lending rates or more general credit supply restraints do not reduce the effectiveness of monetary policy.

This conference organised by Narodowy Bank Polski which we have had the pleasure to take part in has given us a unique opportunity to present the multiplicity of different initiatives and ideas that have been developed by central banks around the world to foster economic and financial literacy. Let me take the opportunity to try and give a brief overview of the material presented over the past two days, which will hopefully make it easier to draw conclusions and pointers as to our future activities.

First, we have learned about the plethora of tools and programmes developed for the general public or particular groups – especially young people. The role of central banks in the field of education is understood as complementary to the tasks of the education system.

Second, the key significance of one of the major inventions of our age, namely the internet, cannot be overestimated. The vast majority of tools and programmes aimed directly at end users rely on the worldwide web. It is important to highlight that in the world of unlimited information presented on the worldwide web, internet users will return only to those sites which they regard as particularly interesting and informative. Hence, we should give users the opportunity to express their views and put forward their suggestions. We must also give them a sense of involvement – and indeed, sometimes, of competitiveness.

Third, we agreed that efforts should also concentrate on initiatives aimed at what we call “multipliers”.

I believe that we will see both of these dimensions developed even further in future. Our cooperation with the education sector should be characterised by an attitude of deference and a spirit of teamwork. We should not forget that even a tool or programme which we consider optimal will be worthless if the information conveyed is incomprehensible, fails to excite interest and does not “stick” in the minds of schoolchildren and students.

The most important lesson to be learned from these examples is that we should be open and receptive to all potential target groups; none of these groups should be overlooked or ignored. On the contrary: we must continually be on the lookout for new approaches and solutions and enter into constructive partnerships – even where such partnerships may appear, at first sight, to be a little unorthodox.

Let me refer, lastly, to the relationship between education and communication.

In my opinion communication policy and educational activities must go hand in hand. Effective communication with the public – explaining the process and objective of monetary policy-making and the rationale behind policy decisions – is an important means to foster economic literacy. It also fosters basic economic education by conveying basic economic insights, principles and theorems when the central bank’s policy and related topics are explained.

Effective communication not only improves the acceptance of monetary policy and the credibility of central banks, it also helps to avoid monetary policy surprises which might trigger unnecessary volatility in the economy. It also gives the public a better understanding of a central bank’s strategy, analysis and policy conduct. This is important for private sector risk management and thus for economic efficiency and stability. If the private sector has a good understanding of a central bank’s policy conduct, it will better understand the conditional co-movement of short-term interest rates and major macroeconomic variables. This, in turn, will help to improve the management of risks by consumers and firms – for example, through a wise choice of the maturity and flexibility of financing.

The ECB, like other modern central banks, makes use of a wide range of communication tools. Allow me to name just a few.

Our two-day meeting here in Warsaw is coming to an end. So let me bring my remarks to a close with a brief summary of four main conclusions which can be drawn from our deliberations and the presentations given:

Allow me now to close by extending warm thanks to the organiser of this meeting – Narodowy Bank Polski – for an extremely well-conceived and expertly organised event.