The road ahead These initiatives are important down-payments towards closing the trust deficit. Yet even if these initiatives are necessary steps, are they likely to be sufficient? The Bank’s Open Forum suggested that would be an optimistic conclusion. So too would the evidence from various opinion polls and, indeed, from banks’ own assessments of their culture. If so, what further initiatives might help in closing the Great Divide? It may be tempting to conclude that the trust gap can be closed by simply having a bettereducated public, one which better appreciates the important role finance plays in supporting the economy and wider society. On this diagnosis, closing the Great Divide would call for enhanced public understanding of finance, perhaps through a targeted public education programme. Yet as Gillian Guy, CEO of Citizen’s Advice, perceptively pointed out at the Bank’s Open Forum, the perception gap may as much reflect the lack of understanding of the public on the part of those inside finance as a lack of understanding of finance on the part of the public. I think that is spot on. Closing the perception gap calls for a two-sided effort. (a)  Enhancing public education  A great many people find financial issues difficult and boring. That is a weak foundation for making good financial choices. At least some of those problems originate in the mental block many people encounter when it comes to mathematics. Finance is a numbers game.
What is the conceptual framework for the performance of central bank functions today? That is to say, how do they decide on their monetary policy stance given the economic situation? Although there are differences between central banks, I believe it is possible to generalise by saying that the prevailing framework is based on the idea that, as a result of various economic frictions, including notably price and wage rigidities, the economy may deviate from full employment and stable prices. The central bank is capable of influencing the state of the economy through changes in the nominal interest rate. These changes affect in turn the real interest rate, i.e. the interest rate adjusted for inflation, which is the relevant one for the investment and consumption decisions of firms and households. 4/7  Thus, by indirectly affecting the spending of economic agents, the central bank exerts influence over inflation, attempting to stabilise it at moderate levels. With this objective, the central bank attempts to ensure that the real interest rate is as close as possible to the economy’s “natural” interest rate, i.e. the rate that would prevail if the economy did not suffer from the frictions that I mentioned. The natural rate, which in recent years has given rise to endless debate among economists, depends on structural parameters, including most notably demographic developments and technological innovation. If the actual interest rate is above the natural rate, the monetary policy stance is contractionary, leading to an excessive decline in prices and economic activity.