The Role of Expectation Management in Economy

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Over the years, many new approaches were raised regarding to the policies and roles of the regulatory bodies in the economy. Many former theories could just survive until a new crisis showed up. In these crises times, central banks(CB), which are the practitioners of monetary policy, and as well as governments, pratitioners of fiscal policy, were criticized a lot.

expectationBeginning from the late second half of twentieth century, alternative or/and complementary policies to intervene the economy gained more importance. It was understood that, to guarantee a well-performing economy, not only the intervention to the markets, but also an intervention to the expectations of citizens was necessary. At this point, trasparency and formal/informal communication tools used by CBs are significant to form and/or influence the money market expectations

To begin with, transparency should be given high importance to increases the efficiency and effectiveness of the tools used by CBs. One reason behind such suggestion is that transparency helps to reduce the bias in money market expectations and dampens their variations. If the market does not sense that CB is transparent, their trust will decrease and they will be more cautious and abstaining for the future. As many CBs, CB of Turkey also gives significant importance to trasparency. We can see that, website of CB of Turkey, (http://www.tcmb.gov.tr/) has many sub categories and anyone in the website can find many materials and statistics both in Turkish and English. The organization scheme and regulations are clear and they are available.

Secondly, formal and informal communications may help control financial market expectations by decreasing the variation of expectations. If the market knows what the CB is aiming and doing, the market will be more positive and hopeful about the future. As tools of communication, CB publishes the documents regarding speeches of the head of CB, policy implementations, inflation reports, meeting summaries etc in its website. Especially, after the 2008 crisis, CB of Turkey started to apply communications tools more frequently. Erdem Başçı, head of CB, gives many speeches to tv channels and interviews to newspapers to inform the citizens and financial institutions about the current situation and steps taken by CB knowing that positive expectations creation is needed.

Expectation management by priorly mentioned ways increases the predictability, so CB can implement more efficient policies and keep consistency. In such a predictable environment, it will be easier to observe the impacts of currently applied policies. Consequently, more efficient policy tools can be created as a result of these observations. In crisis time, expectation management stands as a crucial thing. If the greed is more than panic, it will be really baffling for CB to handle the chaos. To lower the greed, communication tools and transparency should be given high importance.

To sum up, expectation management tools should be used more frequently and efficiently by fiscal and monetary policy actors if they desire to keep the economy more predictable and take precautions for a possible future crisis.

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The Role of Expectation Management in Economy
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  • the role of management to the economy
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