Dr. Econ

Why do you answer people?

October 2006

For starters, I find it fun to think about and answer different economic questions!

Beyond that, though, many economists believe the public’s understanding of economics and current policy issues plays an important role in the economy, and I hope that my answers contribute to that understanding. In short, educating and informing the public about issues relating to the Federal Reserve and economics supports both private and public decisionmaking, as explained below.

1. Education and awareness about economics help the public make informed personal finance decisions.

Better-informed consumers will likely make better financial decisions. For example, understanding the benefits of saving might encourage people to make different consumption decisions than they would otherwise. This is particularly true as financial instruments, investments, and retirement savings options become increasingly complex. Additionally, the proliferation of technology makes it possible for many consumers to make financial investment decisions without the help of a financial planner or other experts—making financial and economic education even more relevant.1 To quote Federal Reserve Chairman Ben Bernanke (Bernanke 2006), “[The Federal Reserve believes] that a better understanding of how the economy works promotes both better citizenship and greater personal economic success.”

While financial education is a worthwhile goal in its own right, one might go even further and hypothesize that a better understanding of economics by the public contributes to keeping the macroeconomy sound: well-informed financial decisions on an individual and firm level may make a wider-spread macroeconomic disturbance less likely to occur. As Boston Fed President Cathy Minehan put it, “informed [financial] decisions help to shape sound economic growth” (Minehan 2006).

2. Education and awareness about economics may make monetary policy more effective.

While economic education and awareness make private decisionmaking easier, this knowledge and insight also may make the central bank’s job easier. A central bank’s commitment to education, information, and transparency enhance that central bank’s credibility, as well as the public’s ability to understand and anticipate policy decisions. Both of these help private individuals and firms align their expectations with the central bank’s goals, ultimately helping monetary policy to be more effective toward achieving those very goals. As San Francisco Fed President Janet Yellen said,

“When [the Fed and the public work together toward the same goals], one often hears the phrase ‘the markets do all the work of monetary policy,’ meaning that market participants correctly anticipate the actions that the Fed will make in response to economic news and shocks. This alignment of the Fed’s actions and the public’s expectations strengthens the monetary policy transmission mechanism and shortens policy lags.” (Yellen 2006)

How does this work? If the public is able to accurately anticipate monetary policy decisions, then it also can incorporate better-informed expectations into private decisionmaking. Additionally, familiarity with policy also may help the public anticipate the central bank’s response to shocks, which may reduce the magnitude of the policy response needed to treat those shocks. 

Central banks can contribute to this awareness in at least two ways: through transparency in monetary policymaking and public information and education efforts.

Transparency efforts

Many central banks around the world, including the Fed, have made considerable efforts to be transparent in their decisionmaking (for more on central bank transparency, see the June 2006 Dr. Econ posting). Monetary policy decisions affect the economy in a variety of ways, so it makes sense that there are a variety of ways in which the Fed communicates with the public. Because Federal Reserve decisions are directly implemented through financial markets, financial market participants are a primary audience for Federal Reserve communications. In fact, many of the ways the Fed communicates to the public are highly scrutinized by financial markets; for more on this, see the September 2006 posting.

The Federal Reserve’s education and public outreach efforts

In addition to direct financial market participants, who might be better versed in certain areas (like financial economics) than other groups because of the nature of their work, it is critical that a variety of groups are able to comprehend Fed communication. The Fed’s monetary policy decisions directly affect individual firms and households because these decisions are related to key interest rates that reflect overall borrowing conditions for items like homes, cars, and business expenditures. To enhance understanding of its various forms of communication and the economic issues underlying them, the Fed makes efforts to educate and inform many different groups of people.

If you want to become familiar with the Fed’s economic education efforts around the country, a good place to start is www.federalreserveeducation.org. This is the Fed’s education website, which is operated by the Kansas City Fed and includes links to resources created by each of the twelve Fed Districts (note the link to “Ask Dr. Econ” on the front page!). Also, you can go to each Fed District’s website to see the education resources each has available. Education certainly is a highly regarded mission of the Federal Reserve. The St. Louis Fed, for example, devoted its entire 2005 annual report to economic education! Check out the San Francisco Fed’s economic education website to see the programs and materials it offers.

Of course, the Fed is not unique in its devotion to the economic and financial education of the public. Listed below are some links to some other central banks’ websites devoted to education.

I hope this gives you a better sense of how and why Dr. Econ and the Fed consider economic and financial education important!

Other central banks’ economic education websites:

Bank of Canada
Bank of England
Bank of Japan
European Central Bank
Reserve Bank of Australia
Reserve Bank of New Zealand
Riksbank (central bank of Sweden)
Swiss National Bank

Endnotes

1. See Bernanke 2006 for comments on the role of technology in financial services, and a brief discussion of research on the impact of financial education on the financial health of consumers.


NOTE: For additional steps the Fed has taken towards transparency from 2006 to 2012:

Dr. Econ (2012:Q2): You have written about Fed transparency before, but I wonder if the Federal Reserve has learned any new lessons in the aftermath of the financial crisis?

John C. Williams. 2011. "Opening the Temple." Annual Report, Federal Reserve Bank of San Francisco.

References

Bernanke, Ben S.  2006. “Financial literacy.”

Hogarth, Jeanne M. 2007. “The Federal Reserve System’s Role in Economic and Financial Literacy – Rationale, Activities, and Impact.” Paper prepared for the 35th Oesterreischische Nationalbank Economics Conference on Human Capital and Economic Growth, May 21-22, Vienna, Austria.

Minehan, Cathy E.  2006. “The Role of Central Banks in Economic and Personal Finance Education.”

Yellen, Janet L. 2006. “Enhancing Fed Credibility.”