Time to reform Reserve Bank governance – domestic public sector perspectives

Yesterday, in discussing my proposition that it is now Time to reform the governance of the Reserve Bank I outlined the contrast between the international perspectives available in the late 1980s when Parliament set up the governance model for the Bank and those available now.  Very few countries then  central banks (or financial regulatory agencies) that had statutory and effective operational policy independence. There was no international standard that could have been followed.  But of the many countries who have reformed their institutions since 1989 not one has followed the New Zealand model.  It is very rare for a single unelected individual to have sole legal responsibility for monetary policy decisions, and unknown for one such person to have decision-making authority on both monetary policy and major policy aspects of financial institution regulation and supervision.

Today, I went to look briefly at how New Zealand public sector governance, and conception around it, have changed since 1989.   The Reserve Bank is just one among many New Zealand public sector agencies, and it is inevitable, and highly appropriate, that thinking around how to design, manage, and govern other New Zealand public sector agencies should influence how we structure our central bank and financial institution regulatory agency.  Huge change took place in the New Zealand public sector in the late 1980s, and the Reserve Bank was somewhat uneasily fitted in to the model.

Back then, the Governor of the Reserve Bank was seen as somewhat akin to a core government CEO. In the reforms of the day, those CEOs were to have performance agreements with ministers, and would be able to be dismissed if they did not achieve the “output” targets specified in those agreements.  Departmental CEOs were envisaged as having considerable operational autonomy to achieve these measureable goals.

The state sector has changed considerably since then.  For a variety of reasons, departmental chief executives have much less autonomy, and there is much greater emphasis on departments working together, and a recognition that most key decisions rest with ministers.  The public service CEO model is not a good guide to how to organise the Reserve Bank, which does have considerable autonomy in policy.

By contrast, the Crown entity model has been developed and systematised subsequently.  The numerous Crown entities each perform statutory roles, across a range of types of activities (some more policy-oriented, and others largely just service delivery).  But I am not aware of any of these entities in which a chief executive has principal policymaking powers.  Rather, key framework decisions are typically made by the board of the respective entity –  and members, and the chair, are directly appointed by a minister.  The Reserve Bank is not a Crown entity (in the formal central government organisation chart) but as a model for governing agencies that exercise independent authority on behalf of the Crown the approaches used in Crown entities (perhaps especially the “Crown agents” class) seem to be a much more suitable starting point for thinking about governing the Reserve Bank.

In the rest of our system of government, single individuals simply do not exercise the degree of power –  without meaningful prospect of appeal or review – that Governor of the Reserve Bank has.

Some extracts from my paper:

As things stood in the late 1980s:

The Reserve Bank was just one of many New Zealand public sector agencies to face far-reaching reforms in the late 1980s.

The governance of government-owned commercial operations had been reformed first (the   SOE model came into effect in 1987).  For entities operating under the SOE model, the governance was to be very similar to that in a conventional corporate: the Minister appointed Board members, who in turn appointed a CEO to conduct affairs under authority granted to him/her by the Board.    For a time, the Treasury had been very interested in the possibility of applying the SOE model to the Bank[1].

The State Sector Act 1988 (and the Public Finance Act 1989) dealt with the non-commercial departments.  The insights that shaped that legislation were more practically relevant to later discussions around the Reserve Bank.

Under the previous state sector legislation, heads of government departments had permanent appointments – a model which had both significant advantages (as regards free and frank policy advice) and significant disadvantages (all but impossible to get rid of weak performers).  The new legislation put chief executives of government departments on fixed term contracts and provided for the establishment of performance agreements between chief executives and the respective ministers.  It provided stronger operational autonomy (from Ministers and from the State Services Commission) for chief executives and agencies, and the focus was on being able to hold individuals to account.

A key part of this, at least conceptually, was the attempt at a clear delineation between, on the one hand, the “outputs” of government agencies (things agencies could directly control – e.g. volume and quality of policy advice; hours devoted to traffic patrols etc) and, on the other hand, “outcomes”.  Outcomes (e.g. a lower crime rate) were things that politicians and the public probably most cared about.  Outcomes were typically affected by the actions of government agencies, but there was no direct and unambiguous mapping between specific actions of agencies and desired “outcomes”.  The conception was that CEOs could be held directly accountable for the achievement of output targets that were set by Ministers in performance agreements.

And as things stand now

Some aspects of 1980s public sector reform have proved resilient.  The domestic SOE model proved relatively successful for commercial operations owned by government, and relatively enduring, in form as well as in substance.  It is becoming less important, particular since the recent wave of partial privatisations, but the proposition that government business activities should be managed commercially, using fairly standard business governance models, has stood up well.

By contrast, in core government departments, the usefulness of the outputs vs outcomes approach as a guiding principle for assignment of responsibilities, and accountability, has probably not lived up to the hopes of the designers.   And, not unrelatedly, the degree of effective operational autonomy for (single decision-maker) department chief executives is far less than was probably envisaged by the early advocates of the model.  More recently, as a matter of active policy, departmental autonomy now appears to be consciously discouraged, with an emphasis on “whole of government” or “joined-up government” approaches –  whether with a view to cost-savings, better policy outcomes, or both.

Much about the way policy is implemented is politically sensitive (i.e. voters expect politicians to be accountable for choices about both “whats” and “hows”).   A government concerned to lift educational standards (an outcome) cannot conceivably simply leave to the Secretary of Education the question of whether to adopt, say, a National Standards regime as an “output” in support of the government’s desired “outcome”

As a result, the clean delineation between outcomes and outputs has rarely worked overly well.  Government departments still have single (unelected) decision-makers (i.e. their chief executives) but those individuals have little effective independence over outward-facing “how” decisions[2] (or, increasingly, over key aspects of the internal management of their own agencies).

There have always been many government entities beyond departments and SOEs.  Numerous Crown entities exist to carry out a wide variety of public functions[3].   A consistent framework for these institutions did not exist in the 1980s but in 2004 the Crown Entities Act was passed.  It was designed, in Treasury’s words, to “reform the law relating to Crown entities and provide a consistent framework for the establishment, governance and operation of Crown entities. It also clarifies accountability relationships between Crown entities, their board members, their responsible Ministers and the House of Representatives”.

The Reserve Bank is not, formally, a Crown entity, standing in a category of its own in the government organisation chart.  There is no obvious reason for that to continue, since there is little obviously unique about the role or functions of the Bank.  But the point I wish to make here is simply that, across the wide range of Crown entities (and various sub-categories within that grouping), I am not aware of any case where a chief executive has principal or exclusive decision-making powers  Crown entities typically exist to give effect to:

  • implement some aspect of government policy (e.g. EQC, ACC, FMA, NZQA),
  • provide advice and/or participate in public debate (e.g. Productivity Commission, Retirement Commission, Law Commission), or
  • carry out some function government has determined to fund and provide (e.g. NZSO, Te Papa).

In some areas, of course, aspects of the application of policy will shade into policy itself, but matters with pervasive external effects are not simply decided by a CEO.  Each of the significant entities I am aware of have a board which has ultimate responsibility for the conduct, and key framework decisions, of the organisation[4].  Board members, and typically the chair, are directly appointed by Ministers, and each chief executive exercises their delegated power under the direct authority of the respective board.

The practice of collective decision-making (and/or formal review or appeal rights) goes still broader, and is deeply entrenched in our system. Indeed, in New Zealand public life, it is difficult to think of any other position in which the holder wields as much individual power, without practical possibility of appeal[5], as the Governor of the Reserve Bank does.  Judges, of course, have the power to imprison – but all lower court decisions are subject to appeal, and higher courts sit as a bench, so that no one person’s view alone decides the case.  Resource management consent decisions, which hugely and directly affect property rights and values, are subject to appeal.  Individual Ministers exercise significant authority, although often requiring the involvement of Cabinet.  In New Zealand, all ministers are elected MPs, and any individual minister serves only at the pleasure of the Prime Minister.  The Prime Minister, of course, has huge power, but cabinet government is a key feature of our system, and (more hard-headedly) the Prime Minister holds power only while he commands the confidence of his own (elected) caucus.  As Kevin Rudd found, that confidence can be withdrawn very quickly.

Typically, public policy decisions that have far-reaching ramifications or that are not customarily made within clear and prescriptive guidelines, are either made collectively, or are subject to appeal, or both.       There is nothing comparable in respect of the Reserve Bank.

[1] The ideas are discussed, not entirely impartially, in chapter 5 of the Singleton et al history of the Reserve Bank.  Note that at the time there was no formal framework for Crown entities.

[2] Of course “who” decisions (eg on prosecutions, or tax audits, or licenses etc) rightly remain far-removed from Ministers.

[3] http://www.ssc.govt.nz/state_sector_organisations sets out all current state sector organisations.

[4] I have not attempted to work through the entire list of Crown entities to check their respective pieces of legislation, so if there are exceptions I would be happy to be advised of them.

[5] The override powers in Section 12 of the Reserve Bank Act do, of course, provide some scope for acting to deal with a Governor doing rogue things – but are not a routine part of governance (and have never been used).  The Reserve Bank can induce, or materially worsen, a recession without significant threat of those powers being used.  Perhaps, for example, it did in 1998, during the MCI fiasco.

A small win for transparency

It has only taken just over two months, for papers that are more than 10 years old, but the Reserve Bank has finally complied with my request for the papers for the March 2005 Monetary Policy Statement.  I welcome the fact that the papers are also being released on the Bank’s website (link below), which makes them widely available, and highlights to future researchers that they have been released.

The Bank has released the papers without redaction, and without withholding any complete papers.  Again,that is welcome (if no more than we should have expected).  But the interesting question is where the Bank’s threshold is.  Would they take the same approach to papers from 2010, or from 2013?  Perhaps someone might like to lodge such requests?   My interest had first been to establish the principle that, albeit with some lag, forecast week papers should be accessible to the public, and open to scrutiny from researchers, MPs, and interested members of the public.  That seems to have been done.

3 June 2015

Mr Michael Reddell

18 Bay Lair Grove

Island Bay

Wellington 6023

Dear Mr Reddell

On 2 April 2015, you made an Official Information request to the Reserve Bank seeking:

Copies of all the papers provided to the Bank’s Monetary Policy Committee, and Official Cash Rate Advisory Group, in preparation for the March 2005 Monetary Policy Statement. In particular, I am seeking all papers that would now be described as “forecast week papers” and any/all email updates/clarifications provided to the committee (whether through hard copies, or thru email groups such as MPCCOM or OCRAG, or their predecessors) from the start of the forecast week for that round to the release of that Monetary Policy Statement

The Reserve Bank is releasing to you the following information:

  1. Alternative forecasts – MPC Paper March 2005
  2. Alternative forecasts presentation (March 2005).ppt
  3. Alternative scenario and uncertainty dept meeting Feb05.ppt
  4. Alternative Scenarios and Uncertainty Memo – March MPS 2005 (final).doc
  5. Alternative Scenarios for MPC.ppt
  6. At first glance – Dwelling consents jan 05
  7. At first glance – Dwelling consents, December 2004
  8. At first glance – wpip December 20040.pdf
  9. At First Glance Feb 05 Consensus Forecasts.pdf
  10. Business investment forecast notes (March 2005 round)
  11. Business Investment Slides March 2005
  12. Consumption forecast notes – March 2005 MPS
  13. Domestic Chart pack March MPS round 2005
  14. Economic Projections for March 2005 MPS
  15. Economic Projections presentation March 2005 MPS
  16. Economic Projections under unchanged policy path, March 2004 MPS.doc
  17. Effective mortgage rates and OCR graph
  18. Emails to MPC and or OCRAG  for March MPS
  19. filenote for Board and OCRAG to reconcile changes between 1st-pass and published March 05 MPS projections
  20. FINAL: Economic projections for March MPS
  21. Financial Market Developments – Week 5 Paper March 2005 MPS.doc
  22. Forecasting notes External Sector March 2005.doc
  23. GDP Forecasting Notes
  24. Indicator chart – 28 February 2005
  25. Migration slides March 2005.ppt
  26. Near-term GDP forecasts
  27. Nearterm GDP slides.ppt

The Reserve Bank intends to publish this response to you on its website. http://www.rbnz.govt.nz/research_and_publications/official_information/

You have the right to seek a review of the Reserve Bank’s decisions, under section 28 of the Official Information Act.

Yours sincerely

Angus Barclay

External Communications Advisor | Reserve Bank of New Zealand

2 The Terrace, Wellington 6011 | P O Box 2498, Wellington 6140


Who has had the stablest current account of them all?

I was reading last night a BIS paper from a couple of years ago about the current account experiences (most recently, experiences of surpluses) of China and Germany. Being a data junkie that led me on to the IMF WEO database, looking at the current account experiences of the various economies the IMF classifies as “advanced”. There are 37 of them (but as ever it is a mystery as to how San Marino makes the list, and I ignore them from here on).

The WEO database has current account data back to 1980, although for some of the former communist countries it isn’t available until the early 1990s. The range of experiences is fascinating:
• Largest deficit was 23.2 per cent of GDP (Iceland in 2006, when the aluminium smelters were going in).
• Largest surplus was Singapore in 2007, 26.0 per cent of GDP.
• Only Luxembourg and Taiwan have not run a deficit in any year since 1980
• Only New Zealand and Australia have not once run a surplus in that period.

I was intrigued by the variability (or in many case, lack of it) of the current account balances. The current account balance is often regarded as a buffer, enabling countries to absorb shocks without disrupting a smooth(ish) path of per capita consumption. But here are the standard deviations of the current account balances (as a per cent of GDP) for each of the advanced countries since 1980 (or for the full period for which there is data for each country, but in all cases at least 20 years).


Some of the results surprised me. Australia, in particular, which has had the smallest standard deviation in its current account balances of any of these countries, over 35 years. For a country with a quite volatile terms of trade, and having a massive investment boom in the minerals sector over the last decade, that is quite remarkable. At the other end of the spectrum is Singapore. Singapore’s current account has been becoming much more volatile but the very high standard deviation also partly reflects a structural (but highly distorted) transition from some of the larger current account deficits in the sample, back in early 1980s, to the largest surpluses more recently.


A stable current account deficit is neither obviously good nor obviously bad.  It depends on the shocks the particularly economy has faced. And the exchange rate regime plays a part (although of course, the choice of exchange rate regime should depend, at least in part, on the sorts of shocks the economy faces).

Only four of these 36 countries have had a floating exchange rate for the whole period since 1980 – the United States, the United Kingdom, Canada and Japan. All four show up as having had relatively stable current account balances. We could add in Switzerland – with a brief deviation from floating quite recently – and Australia, which has floated since 1983. Five of the six are then among the countries which have had the most stable current accounts, and Switzerland has been around the median. New Zealand’s experience also sits with this stable group, again despite having had some of the most volatile terms of trade of any of the advanced economies.

What about the other end of the spectrum? Of the 10 countries which have had the most volatile current account balances, only Taiwan and Norway now have floating exchange rates. Iceland’s floated freely for a while, but is now managed, as is Singapore’s.

As one would expect, it looks as though in floating exchange rate countries, the exchange rate has reduced the extent of the variability in countries’ current account balances. That isn’t surprising, and it is consistent with formal New Zealand work on how the exchange rate has responded to commodity prices and/or the terms of trade. But it might not always be a desirable feature either. Some shocks will be domestic in nature, and in principle it might be better to absorb them in greater variability in the current account rather than in the exchange rate. And if the terms of trade are volatile, there might also be a case for allowing more of the variability into the current account, rather than immediately seeing the real exchange rate move against producers in all other tradables sectors (eg if dairy prices soar, a higher exchange rate might smooth the effects on dairy farmers, but could greatly complicate life for other tradables sector producers).  If the terms of trade shock is lasting, the real exchange rate will rise eventually, but if not then perhaps less variability in the exchange rate might have some advantages.

Simple charts like this don’t lead to policy conclusions. After all, one of the big challenges firms (and households and governments/central banks) face is knowing which shocks are temporary and which are permanent.  We need a regime that is robust to our uncertainty about the shocks.  And any consideration of a more-fixed exchange rate for New Zealand would run into the complication of the long-term differential between our interest rates and those abroad. (At the extreme, a fixed exchange rate would equalise nominal interest rates, but wouldn’t itself change the conditions that had required the difference in real interest rates in the first place).

I’ve tended to be a defender and advocate of the floating exchange rate regime for New Zealand – not necessarily as a first best option, but as better than any of the feasible (and freedom-respecting) alternatives for the time being. On the whole, I still think that is probably the right conclusion, but I do find it a little surprising, and perhaps a little troubling, that New Zealand has had one of least variable current account balances among advanced economies in the last 35 years. The positive dimension of that is that New Zealand never faced a serious external funding crisis in that time (unlike the Baltics, or Korea, or Greece or Portugal). But it hasn’t exactly been an untroubled time for New Zealand – it is a period that encompasses Think Big, huge swings in fiscal policy, credit booms and one bust, financial crisis, considerable variability in the terms of trade, and so on.

Oh, and this was the chart I first went looking for: There is a loose, but positive, relationship between each country’s average current account balances over 1980-1994 and those now.  Countries that had deficits back then tend to have deficits now, and those which had surpluses then tend to have surpluses now.

cab correlation