Time to reform Reserve Bank goverance – international perspectives

On Saturday evening I put out my paper Time to reform the governance of the Reserve Bank.  It was slightly odd timing in some ways, but the Sunday Star Times had expressed interest in giving the issue some coverage.

Many people won’t read an 18 page paper, so I’m going to highlight some of the key aspects of the paper in a series of posts this week.  The essence of my argument is that decisions around monetary policy and financial regulatory policy should not be exercised by a single unelected official, no matter how good the official.  No other advanced democracy does it that way, and New Zealand runs no other aspects of policy that way.

But I should first repeat one point.  Decisions around the governance of the Reserve Bank are a matter for the Minister of Finance and, ultimately, for Parliament, so my arguments for change are not criticisms of the Bank, but of the choices Parliament and successive ministers have made (most recently, through decisions not to change the system).    Officials operate within structures that politicians establish.  And contrary to the headline in print version of the Sunday Star Times, I am not arguing that the “RBNZ wields too much power”, rather that, given the responsibilities Parliament has assigned to the Bank, the Governor himself (any Governor) exercises too many of those powers.  What powers the Bank should, or should not have, is a topic for another day.

The Reserve Bank operates under an Act that was initially passed in 1989.  The Act has been amended quite a few times since then, mostly to add new powers and responsibilities.  The governance structure, however, has not materially changed since 1989.  In the paper, I highlighted four strands of thinking or data that influenced choices made a quarter of a century ago, and how differently things look on each of those counts today.  The governance structure chosen in 1989 was unusual, but there was a logic to it.  Things are different now.

The first of my four aspects was international experience.  In 1989, not many other central banks had effective and statutory independence in monetary policy (and not much attention was paid to financial regulation).  In 2015, there are plenty of countries to look at.  Only one other allows (as a matter of law) the central bank Governor to make interest rate decisions himself (rather than by legislated committee, with the associated checks and balances).  No other country allows a single unelected official to make decisions on both monetary policy and supervision/regulation himself.

Here is what I said, quite briefly, about international experience.

As things looked in 1989:

First, at the time only a few other central banks had (both statutory and effective) operational independence.  The ones New Zealand officials tended to be interested in were the central banks of the United States, West Germany, and Switzerland, and none of those were from the the British-based tradition of parliamentary and public sector governance.  In other words, there were few international models that could readily be adopted in New Zealand[1].   The Reserve Bank of New Zealand legislation was the first in what was a whole wave of new central banking legislation around the world over the following 10-20 years.

[1] The Reserve Bank’s own initial proposal to the Minister of Finance was based around the Australian statutory model. In that (1959) model the Reserve Bank of Australia’s Board was formally the decision-making body, but the Federal Treasurer could override the Bank so long as this was done openly (tabled in Parliament).  Appealing as the model may have looked on paper, it was a curious recommendation since, in practice, the RBA  participated actively in the public sector policy debate but ultimately did as it was told from Canberra, and the formal override powers were never –  and have never been – used.

For some discussion of this and some of the other historical material see my 1999 Reserve Bank Bulletin article “Origins and early development of the inflation target”

http://www.rbnz.govt.nz/research_and_publications/reserve_bank_bulletin/1999/1999sep62_3Reddell.pdf

And as things stand today

The fourth aspect where events have unfolded differently has been in what other countries have done in reforming their central banks and financial regulatory institutions.

Take monetary policy first.  Since 1989, there has been a substantial global shift, in both legislation and practice, to provide many more central banks with operational autonomy for monetary policy:  Among the G7 countries, central banks in the UK, Japan, and France have been given independence, and the (new) ECB has the highest level of monetary policy autonomy of any modern central bank.  Across eastern Europe (still mostly communist in 1989), and other parts of the emerging world, there have been similar trends.  But not a single advanced country, of the many to have reformed their central bank legislation, has moved to a model with a single unelected individual as decision-maker for monetary policy[2].    Despite all the attention paid to the New Zealand reforms, no country has adopted the New Zealand governance model[3].

Governance models for banking regulation/supervision in other countries are quite diverse.  In some countries many or all of these activities occur within central banks, and in other cases most of the regulatory functions occur in separate agencies.  However, I am also not aware of any advanced economy in which Parliament has delegated the major policy decisions in respect of financial supervision/regulation to a single unelected official.  A decision-making Board, advised by technical experts, is a much more common model, and in some cases many more of the policymaking powers (than in New Zealand) are reserved for ministers.

In sum, in no other advanced democratic country does a single unelected official exercise so much power in matters of monetary policy and financial regulatory policy.  Only in Canada’s case, with rather old legislation, does a single official exercise final legal power (in respect of monetary policy), and the Bank of Canada has very much more limited functions than the Reserve Bank of New Zealand.

[2] I am not aware of any developing countries having done so either, but have looked less deeply into the range of reforms in those countries.

[3] A few years ago Israel amended its central banking legislation to shift from a single decision-making Governor, to a decision-making monetary policy committee.  For a useful survey of monetary policy governance in a range of advanced countries see http://www.rbnz.govt.nz/research_and_publications/reserve_bank_bulletin/2014/2014mar77_1aldridgewood.pdf

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