Over the past three decades, central banks, including the Bank of Canada, have transformed their public communications regarding the conduct of monetary policy. Before then, they provided little rationale for their actions. Nor did they say much about the economic outlook or the likely future direction of policy. It seems strange in retrospect but this lack of transparency was generally regarded as a virtue. As Federal Reserve Board Chairman Alan Greenspan put it in September 1987, “Since I have become a central banker, I have learned to mumble with great incoherence. If I seem unduly clear to you, you must have misunderstood what I said.”

The argument for opacity was that monetary policy would be more effective if financial markets could not easily anticipate central bank actions. This view made some sense in an era when exchange rates were fixed, since hinting at future monetary policy changes (e.g., lowering interest rates) could trigger speculative runs on a country’s currency. But after the collapse of the Bretton Woods system of fixed exchange rates in 1971, and most countries’ subsequent adoption of flexible, market-determined rates, this rationale for secrecy all but disappeared.

Another important motive for it remained, however. Not clearly explaining their policy actions allowed central bankers to avoid accountability for actions that ended up being ineffective or even inappropriate. This was especially valuable given both the lack of clarity at the time about exactly what their mandate was and the considerable uncertainty surrounding the effectiveness of monetary policy instruments.

The inflation of the 1970s and 1980s led, however, to widespread public dissatisfaction with monetary policy and contributed to a shift in how central banks communicated with financial market participants and the public more generally. In particular, they acknowledged the need to be much clearer about their objectives, which ultimately led to the adoption of numerical inflation targets. The financial crisis of 2008-2009 also brought increased transparency regarding monetary policy tools, as many central banks implemented non-conventional policies such as “forward guidance” and quantitative easing, which were not well understood by financial market participants at the time and needed to be explained.

At the Bank of Canada, increased transparency around monetary policy objectives, tools and strategy improved the Bank’s credibility and helped it hit its inflation target in the three decades preceding the COVID-19 pandemic. In addition, the monetary policy framework agreement between the Bank and federal government that gives the Bank operational independence also helped reinforce the public’s belief in the Bank’s commitment to the target—which remains largely intact today. Despite the sharp spike in inflation over the past 16 months, long-run inflation expectations remain close to the two per cent target, which suggests the public still believes the Bank is credible.

The improved transparency of the Bank of Canada’s conduct of monetary policy stands in stark contrast to how the Trudeau government conducts fiscal policy. In a recent review, the International Monetary Fund recommended that Canada should bring back a debt anchor to improve the accountability and credibility of fiscal policy and guide expectations about its future path. The current government was elected in 2015 on a promise to hold deficits to $10 billion per year, but as government spending grew, the fiscal target was changed—first, to maintaining the debt-to-GDP ratio at 30 per cent and then to simply reducing debt as a proportion of GDP. But even that has proven difficult, and the debt-to-GDP ratio has risen consistently since 2015.

The Trudeau government’s shifting fiscal targets, which seem unmoored from actual policy, have seriously eroded public confidence in its management of federal finances. And the resulting fiscal uncertainty has arguably discouraged capital investment in Canada, thereby contributing to slow growth in labour productivity and stagnant per capita income over the past decade.

In the conduct of policy, whether monetary policy or fiscal policy, transparency and accountability are key to credibility.