The Importance of Communication in Macroeconomic Policy Management
Director of Ceremonies
I am pleased and indeed it is an honour to be part of this important information sharing and empowering Seminar, organised by the Kgori Business Press Club. The initiative for this forum resonates with the Bank’s desire to contribute to the development of informed financial and economic journalism as a means of improving transmission of market information, as well as incisive commentary on policy analysis and decisions. For a number of reasons, a central bank needs to continually interact and disseminate information to stakeholders. Such interactions and communication clarify the Bank’s role and, therefore, reinforces the effectiveness with which it discharges its mandate of ensuring price stability, sound financial and well-functioning payments systems and, more broadly, financial stability.
Director of Ceremonies, the subject of my remarks this morning is ‘The Importance of Communication in Macroeconomic Policy Management.’ For this purpose, let me distil macroeconomic policy into three distinct elements, namely fiscal policy, monetary policy and exchange rate policy; and for convenience add financial sector policies in order to complete the interactive and inherent relationships involved.
Distinguished guests, ladies and gentlemen, you will appreciate that individually and together, these policies are intended to affect the behaviour of economic agents, which is, their response in terms of the supply and demand factors of economic activity. At a broad level, this entails decisions to invest, save, consume, and/or trade across borders. In this regard, the relative incentives across sectors and industries engendered by the various policies and instruments will have an impact on the rate of economic growth, in other words, the pace of increase in national wealth and living standards. Evidence from the 2007/08 global financial and economic crisis indicates that if not well managed and coordinated, macroeconomic and financial policies also have the potential to undermine economic growth.
At this point, distinguished ladies and gentlemen, let me take a moment to illustrate the influence of the various policies and related instruments on real economic activity:
Starting with Fiscal Policy – In a situation of slow economic growth, fiscal policy might involve increase in expenditure or reduction in taxes by Government to stimulate activity. In the event, spending by government and lower taxes generate an increase in demand, including consumption, providing an incentive for businesses to invest and increase operations to meet the higher demand; thus making positive contribution to economic growth.
Monetary Policy – With regard to monetary policy, again assuming a need to support growth, a reduction of interest rates by the central bank, in the right level of doses, will lower the cost of finance, therefore, potentially leading to higher demand by consumers and investment by businesses, ultimately raising the overall rate of economic growth.
Exchange Rate Policy – A discretionary devaluation or maintenance of an undervalued exchange rate could be undertaken in order to enhance the competitiveness of the domestic industry in external markets and against imports. This is relevant for supporting sustainable industrialisation and diversifying sources of growth, and may similarly raise overall rate of economic growth.
Financial Policies – In this area, a sound, stable and inclusive financial sector not only facilitates the conduct of transactions and payments, but it is also the conduit through which macroeconomic policies are transmitted to real economic activity. Thus, there is need for continuous attention to ensure the developmental aspects, as well as integrity, safety, stability and a well-functioning financial sector to support sustainable and inclusive economic growth.
Distinguished Guests, I now to turn to the role of communication in ensuring ultimate efficacy of the various policies or actions and decisions. Efficacy or potency in this regard would mean policy action having the desired or intended outcome. In the examples given above, this would mean higher rates of economic growth with respect to fiscal and monetary policies and a faster pace of industrialisation arising from the exchange rate policy.
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By Moses D Pelaelo
Governor, Bank of Botswana