What is Moral Suasion?
How are moral suasion techniques used in economics?
What are the essential elements you should know!
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Table of Contents
What Is Moral Suasion
Moral suasion (or jawboning) is a phrase used in economics to refer to the act of persuading others or a group of people to act a certain way through persuasion rather than force.
The idea behind moral suasion is to “convince” or “influence” the actions and behaviors of another.
The reason why it’s called “moral” suasion is that it’s a technique or attempt to put pressure on a person’s moral responsibility to act or behave in a certain way.
Anyone can achieve moral suasion.
The moment you can change a person’s conduct or attitude through rhetorics and persuasive speaking, you have achieved moral suasion.
In economics, “suasion” or “moral suasion” is a strategy used for the greater good.
Of course, if policymakers and central banks misuse their market influence and power, it can lead to a disastrous impact on the markets and the economy.
With that said, when moral suasion strategies are used, it’s typically designed to influence the markets, market participants, and the economy in a positive direction.
Moral Suasion Definition
How do you define moral suasion?
Moral suasion is a communication technique used by policymakers such as the Federal Reserve or Central Banks to influence the markets, market participants, and the economy to achieve better results.
In contrast, techniques that use coercion, force, threats, or other forceful methods are the opposite of moral suasion.
Economics
In economics, the phrase “moral suasion” is used by the central banks to refer to ways policymakers can appeal to companies, individuals, or other groups to act in a certain way.
Through persuasion, rhetorical appeals, and similar communication tactics, central banks and policymakers use moral suasion to influence the market and public sentiment.
The idea is to have the individuals in the economy feel that things are under proper control.
Moral suasion provides a sense of comfort leading individuals and companies to act in a certain way.
Features
What are the features of moral suasion?
Here are some of the key characteristics and features of “moral suasion” used in economics:
- There are acts of persuasion
- It’s a qualitative tool
- It is directed by the Central Bank
- It is a monetary policy instrument
- It strives to seek cooperation
- It involves personal interactions
- There is a psychological impact
As you can see, based on these features, we can say that moral suasion is a tool used to have a psychological impact on market participants aimed at influencing their behavior to achieve a specific objective.
Moral Suasion Types
There are two types of moral suasion:
- Pure
- Impure
Pure moral suasion is an appeal made to others to adopt an altruistic behavior.
Impure moral suasion is an appeal to a person or others to change their behavior through either incentives or implicit consequences.
This strategy is more often used in economics by the authorities to incentivize people or groups of people to act in a certain way or dissuade them from doing something.
The government, public entity, or policymaker using this strategy is to have targeted members of the economy act according to their wishes.
Jawboning
In the United States, the term “jawboning” is used to refer to instances when the U.S. Federal Reserve enacts moral suasion tactics.
Moral suasion techniques are used in some cases voluntarily and in other cases as the Central Banks do not have any other option.
For example, in periods of expansionary monetary policy when the interest rates are at their lowest, the central bank does not have much room to achieve its goals due to the rock-bottom levels of the rate of interest.
Since open market operations are not possible or direct monetary policy tools are not available, the central banks use moral suasion to convince people that it is in control and can support the economy in many ways.
Example
One of the most notorious examples of moral suasion techniques used is when the New York Federal Reserve intervened to bail out Long-Term Capital Management, an investment company that had lost billions of dollars.
LTCM was a highly leveraged hedge fund that became insolvent due to the Asian Financial Crisis back in 1998.
Another example where moral suasion is used is when the Central Banks attempt to influence the market rate of inflation instead of implementing specific measures or operations.
Another famous example of the suasion technique is that of William Lloyd Garrison and his American Anti-Slavery Society aimed at ending slavery in the United States.
Takeaways
How do you define moral suasion?
Let’s look at a summary of our findings.
Moral Suasion Meaning
Terms Related to moral suasion
Bandwagon effect
Constructive ambiguity
Consumer surplus
Emotional intelligence
Fedspeak
Fiscal policy
Inflation targeting
Irrational exuberance
Monetary policy
Social science
