Jens Weidmann: What the future holds - benefits and limitations of forward guidance

Speech by Dr Jens Weidmann, President of the Deutsche Bundesbank and Chair of the Board of Directors of the Bank for International Settlements, at the European Banking Congress, Frankfurt am Main, 22 November 2019.

The views expressed in this speech are those of the speaker and not the view of the BIS.

1 Introduction

Ladies and gentlemen,

More than 200 years ago, French scientist Pierre-Simon Laplace proposed that the universe was essentially deterministic and, hence, predictable. Some being - later called a demon - with sufficient information and calculating power would be able to know all the states of the universe: past, present and future.

In today's financial markets, Laplace's demon could easily earn a fortune. But despite all the progress in computing, it has never come into existence. Still, some people may dream of its possibility. Brazilian author Paulo Coelho once quipped that everything was possible: "from angels to demons to economists to politicians".

Financial market participants are no demons: they carefully monitor every word uttered by central bankers, because failing to anticipate the central bank's next move could be costly.

For a long time, central bankers were reluctant to provide hints on their expected future course of action or communicate openly. A good example is former Fed Chair, Alan Greenspan, who once told Congress: "If I seem unduly clear to you, you must have misunderstood what I said". And according to Otmar Issing, central banking was "presented as an esoteric art".