(Un)Constructive Ambiguity

The subtle but crucial difference between threatening and doing nothing — and doing nothing while making others believe you're ready to do whatever it takes.

The world’s leading central banks should be carefully studied and emulated by policymakers.

Central banks are institutions from which many valuable lessons can be learned. Though they have inevitably made mistakes throughout their histories, they have always strived to learn from them in pursuit of their mandates.

For about two decades, modern monetary policy has been forced to evolve. Since central banks began using their balance sheets (through quantitative easing programs) as unconventional monetary policy tools, they have had to rapidly learn how to interact effectively with financial markets.

Markets are powerful beasts: large, strong, and sophisticated.

But central banks are powerful too; strong and highly refined in their tools and thinking. There was a strong temptation to confront markets head-on. After all, why should the market be perceived as more powerful than the institution that creates the very oxygen it breathes: money?

And yet all major central banks quickly understood one thing: they don’t stand a chance against the market when it moves as a whole.

When the market, in its entirety, deems something appropriate, the central bank must adapt. It must respond to reality, not attempt to reshape it. This requires respecting one’s counterpart, studying it, monitoring it closely, understanding the key players and their utility functions; anticipating reactions and having countermoves ready. This is multilateralism in action.

A central bank that acts without awareness of how its decisions will be received is bound to fail. And failure erodes something vital: credibility.

Losing a battle with the market — whether over an exchange rate or an equilibrium interest rate — leads to financial consequences (e.g., loss of foreign reserves) and economic ones (e.g., recession or overheating). But more importantly, it undermines credibility, which is as essential to monetary policy as the actions themselves. Communication becomes ineffective without it.

Had the ECB lacked credibility, Mario Draghi’s famous “whatever it takes” statement would have backfired. Markets would have tested the central bank’s resolve, its point of intervention, and its appetite for credit risk. The tool might have failed. But instead, not a single euro was spent, and convertibility risk vanished. The same applies to the ECB’s Transmission Protection Instrument: not a euro deployed, yet sovereign spreads weathered the most aggressive monetary policy normalization in fifty years, seemingly without stress.

Bottom line: credibility matters. A lot.

What undermines credibility? Many things, both structural and behavioral. But perhaps the most significant and insidious factor is a lack of genuine respect for one’s counterparts, particularly those whose objectives and utility functions differ from, or directly conflict with, one’s own. In any complex negotiation or strategic interaction, assuming that your interests are inherently superior, or that others will naturally align with your position, is a fatal misjudgment. Credibility is built not only through consistency and competence, but through empathy and strategic awareness; an understanding that others are rational agents in their own right, with incentives, constraints, and perspectives that deserve careful attention.

Failing to fully study and understand your counterparts (who they are, what motivates them, how they perceive risk, and the environment in which they operate) leads to flawed assumptions and poor-quality decisions. It creates blind spots that, over time, accumulate into systemic errors. When one enters a negotiation without this preparatory awareness, relying instead on assumptions or institutional arrogance, the result is often a breakdown of trust and communication.

Worse still is the tendency to try to compel agreement through blunt force, by presenting proposals that are either tone-deaf to the concerns of the other party, or worse, perceived as dismissive or coercive. Such approaches reduce the likelihood of cooperative outcomes and often provoke defensive or retaliatory responses. What should be a process of mutual recognition and adaptive alignment becomes a zero-sum confrontation, marked by escalating resistance and a lasting erosion of credibility.

But perhaps the gravest risk is not understanding your own relative power. Believing you are indispensable, rather than simply important, is the cardinal sin of hubris: arrogance. And it’s unacceptable.

The world is multilateral. This does not mean it is made up of many smaller, independent pieces; rather, it is composed of many players who, when necessary, coalesce and become unbeatable; just as markets can overpower central banks.

Perhaps it’s truly time to treat central banks as examples to learn from.

Because the art of negotiation takes on a different meaning entirely when the interest at stake is the public’s.