Central banks are starting to put more value on anecdotal evidence

By Gillian Tett

Last year scholars from University College London, Binghamton University and Cambridge, set about studying the so-called British “agents” that the Bank of England discretely uses to get “intelligence” on the economy. 

No, this is not central bankers’ version of James Bond. Instead the “agents” label refers to a 9,000-strong network of “real economy” participants (such as business leaders) who regularly meet with bank officials to discuss economic trends and sentiment.

Typically, 700 such contacts are interviewed each month. So the researchers — co-led by David Tuckett, a professor of psychoanalysis and director of UCL’s Centre for the Study of Decision-Making Uncertainty — watched 150 of these meetings, and then tracked how bank officials analysed the anecdotes they gathered and prepared reports for meetings of the Monetary Policy Committee.

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The results should be of interest to investors, particularly given that the Covid-19 pandemic is unleashing such profound economic uncertainty that BoE officials such as chief economist Andy Haldane are fretting about the dangers posed by “contagious pessimism”.

The study concluded that the anecdotal data gathered from the agents’ network plays a surprisingly important, but largely unheralded, role in shaping BoE policy. Its authors correctly and sensibly urge the bank, and its counterparts, to give more prominence and respect to this activity.

“The intelligence gathered from conversations with businesses is uniquely useful for both the analysis and communication of monetary policy,” they conclude. Or, to put it another way, investors might act as though central banking policy was all about statistics and models, but words matter, particularly in a Covid-19-plagued world.

When officials engage in these agents’ meetings, they are not only gathering stories about the economy but imparting their own central banking stories too. There is a two-way dialogue under way. Or, to use a phrase popularised by economist Robert Shiller, we are all engaged in “narrative economics”, in the sense that the economic stories that we tell ourselves and others impacts real behaviour.

What matters with narrative economics, however, is not simply whether people feel optimistic or pessimistic in general; equally important is the level of confidence they feel about economic forecasts.

This latter point is not recognised in financial models, since they assume economic actors have a consistent mental map about the passage of time and their forecasting (and risk-taking) abilities. In most macroeconomic models, in other words, “unstable systems are treated as atypical”, the researchers argue.

Yet in most social science analysis there is less reverence for stability. Some economists, such as the late Frank Knight of the University of Chicago, have been interested in how humans react to unmeasurable risks. One reason narrative economics is so important now is that it offers a lens through which to examine (and possibly counter) the type of radical, or “Knightian” uncertainty that is engulfing many consumers and companies in the face of Covid-19. Anecdotes can reach problems models cannot solve.

Thankfully, the western central banking community appears increasingly to recognise this. The BoE is starting to highlight the role of the agents’ network in its public pronouncements and launching debates about how it could and should communicate more effectively with the wider public. 

The US Federal Reserve is moving in the same direction, albeit more slowly. Last year it launched a series of so-called “Fed Listens” initiatives, under its chair Jay Powell, in a bid to embrace the voice of non-financial actors, for example.

It is also conducting internal debates about how to speak in language that ordinary mortals might understand and how to counter extreme uncertainty. The days when a Fed chair such as Alan Greenspan was praised for a communications stance marked by “constructive ambiguity” are over. Clarity and listening is the new mantra.

This is a welcome development — albeit a belated one. If only central bank officials in the Anglo-Saxon world had done more to listen to participants in the “real economy” and speak in a language they could understand before 2008, the subprime mortgage disaster, for example, would not have been as bad.

But there is more to be done. It would make sense for the Fed to embrace something like the British agents’ network and publish its findings. The BoE could and should give more prominence to its agents. Central bankers on both sides of the Atlantic should also try harder to make their actions more comprehensible to the public. Above all else, though, they need to persuade economists that qualitative research need not displace quantitative analysis, but can rather complement it.

After all, at a time when investor exuberance continues its divergence from the pain being seen in the real economy, there is a greater need than ever for central bankers to understand what is happening outside any ivory tower. The BoE’s “intelligence” agents should proudly come out of the shadows; particularly as we struggle to prepare for a post-pandemic world. 

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