I wasn’t really planning a post today. I’m in the middle of preparing a speech/presentation on the Reserve Bank and the housing market (working title “Intervening without understanding”). But the Reserve Bank yesterday released some (a) comments on their forecasting review process and some aspects of monetary policy, prepared by a former BIS economist, and (b) the Bank’s spin on those comments. Various people got in touch to say that they were looking forward to my reaction.
When an old uncle or family friend is in town and comes for dinner, the visitor will usually compliment the cook, praise the kids’ efforts on the piano, the sportsfield, or in dinner table conversation, and pass over in silence any tensions or problems – even burnt meals – he or she happens to observe. Mostly, it is the way society works. No one takes the specific words too seriously – they are social conventions as much as anything. One certainly wouldn’t want to cite them as evidence of anything much else than an ongoing, mutually beneficial relationship.
Philip Turner is a British economist who has recently retired from a reasonably senior position at the Bank for International Settlements. The BIS is a club for central banks, and a body that has been champing at the bit for much of the last decade, encouraging central banks to get on and raise interest rates again. Turner himself spent his working life in international organisations – before the BIS he spent years at the OECD, where he developed a relationship with Graeme Wheeler (who was The Treasury’s representative at the OECD for six years or so). He has never actually been a central banker, or involved in national policymaking.
Back in 2014, Graeme asked Turner to review the Reserve Bank’s formal structural model of the economy (NZSIM). I didn’t have much to do with him on his visit then, but my impression (perhaps wrongly) was of someone now more avuncular than incisive (albeit with the odd interesting angle). Having left the BIS last year, the Governor invited him back to New Zealand earlier this year, during which he sat through, and offered some thoughts on, the three-day series of forecast review meetings the Bank undertakes in the lead-up to each Monetary Policy Statement.
There is nothing particularly unusual about that. Perhaps twice a year the Bank has someone in who does something similar – often a visiting academic or foreign central banker who was going to be in Wellington anyway. It is an interesting experience for the visitor – I will always remember the time Glenn Stevens (subsequently the RBA Governor) participated, and came out declaring that he now realised we were much less mechanistic than we seemed – and usually there is the warm fuzzy feeling of mutual regard. The visitors – friends of the Reserve Bank to start with – get closer to the monetary policy process than is typically permitted in other central banks, and they are usually suitably appreciative. Their reports, typically passed on to the Board, typically convey the sense of how good the process is, but sometimes there are even quite useful specific suggestions. I’m not aware that such reports have ever previously been made public – and I suspect that had someone asked for them under the Official Information Act, the Bank would have been as obstructive as ever. Perhaps Turner’s report was particularly generous, perhaps the Governor was feeling particularly beleagured – eg after the Toplis censorship attempts – but for whatever reason they have both released his report, and attempted to spin it well beyond what it warrants.
Actually, for those not familiar with the Reserve Bank’s internal process, the report may be of mild interest. The description of the three days of meetings Turner sat through rang true – and was interesting to me because it suggested things are still much as they were when I was last involved 2.5 years ago. It will complement some of the other material the Bank itself has released on its processes.
In its press release, the Reserve Bank claims that Turner “commended the Reserve Bank’s forecasting and monetary policy decision-making processes”. In fact, he did nothing of the sort. He had no involvement in observing the preparation of the draft forecasts (the background work undertaken by the staff economists), he was not apparently invited to observe the Governing Committee discussions where the Governor makes his final OCR decision, and he engaged in no attempt to assess the Bank’s track record in forecasting or policy. That isn’t a criticism of Turner. He wasn’t asked to do those things. Instead, he will have been handed a binder of background papers, and sat through perhaps 8 to 10 hours of meetings where those papers are discussed and issues around them identified.
That said, there is no doubt he is effusively positive about that process.
This process, which takes advantage of the small size of the central bank, avoids a problem that affects many other institutions. This is that unpopular or unorthodox opinions can get filtered out by successive levels in the hierarchy, as it is only more senior staff who make the presentations to Governors……
The open working-level culture is a credit to the RBNZ. Junior staff are given their voice. Views or arguments expressed by colleagues are challenged in a constructive and professional way. This is essential if the policy blind spots of a few individuals are to be avoided.
In my (rather long) experience there was an element of truth to all this. The Bank is unusual in having very junior staff presenting directly to Governors. That is generally good for them, and sometimes works well. Then again, the Bank is a small organisation. But it often involves people with quite limited experience or perspectives who can be quickly at sea when taken just slightly off their own safe ground or the established “model”. It is an operational model that has some strengths, in staff development, but strongly prioritises (by default – it is usually what 22 year old economists can do) fluent updates on the status quo.
There was also typically plenty of opportunity for people to chip in with unthreatening questions or clarifications.
But as for unpopular or unorthodox views being welcomed and heard……..
Perhaps things have changed a lot for the better in the last 2.5 years, but it hadn’t been my impression of the Bank’s processes for quite some considerable time. I largely stay clear of Reserve Bank people these days (for their sake as much as anything) but nothing I hear through others suggests that the institutional culture has improved. And how likely is it when the Governor is so outraged by external critical comments that he enlists each of his top managers to try to shut Stephen Toplis up, and when that fails he tries heavy-handed approaches to the CEO of the BNZ, a body the Governor himself regulates? Whatever Turner’s (no-doubt genuine impressions) of the meetings he sat through, I suspect he saw what he wanted to see. He formed a good impression of the Bank decades ago, his friend Graeme is now the boss and invites him over for a spot of post-retirement consulting, and when everything is presented as rosy, everyone is happy.
As a reminder, the Governor is so scared of diversity of view that he refuses to release – even years after the event – background papers, the balance of the advice he receives on particular OCR decisions, or the minutes of Governing Committee meetings. But apparently Uncle Philip says all is good, and that should really be enough for us.
Turner saw what he thought he saw in the meetings he sat through. Then again, he will have little or no familiarity with the New Zealand data, issues, or context.
And on that count what was perhaps more surprising was the rather strongly-worded declarations he offered on monetary policy (substance not decisionmaking process) in New Zealand in recent years. One might suppose that such conclusions – not just offered in passing over a drink, but now as an officially-authorised publication of the Reserve Bank – might require engaging with the data, with the details of the Bank’s mandate, with alternative perspectives, and so on. But there is no evidence of any of that.
What specifically bothers me? Well, for a start there is no mention of the fact that the Reserve Bank of New Zealand is unique in having run two quickly-aborted tightening cycles since the end of the 2008/09 recessions. Then again, as I noted earlier, the BIS has long looked rather askance at low global interest rates, and has been keen – with no mandate whatever – to have advanced country interest rates raised again. So was the Governor – who keeps talking about how extraordinarily stimulatory monetary policy is. But as an experiment, raising interest rates didn’t work out that well here. And, at bottom, however good the process looked, the substance of the forecasts was repeatedly wrong.
Turner also gets into selective quotation of the Policy Targets Agrement. He argues that
Clause 4(b) adds further that “the Bank shall implement monetary policy in a sustainable, consistent and transparent manner, have regard to the efficiency and soundness of the financial system, and seek to avoid unnecessary instability in output, interest rates and the exchange rate”. I have italicised these words because they describe a mandate that is realistic about what monetary policy can achieve. This mandate would not have been fulfilled in recent years, given the large shocks to international prices, by trying to keep the year-on-year inflation rate in New Zealand at close to 2 percent. To have achieved this, interest rates would have had to move by more than they have in recent years, and this would have created the unnecessary instability in output and the exchange rate that the RBNZ is enjoined to avoid.
Of course, no one has ever argued that headline CPI inflation should be kept at 2 per cent each and every year, so to that extent he is addressing a straw man. Perhaps, charitably, he means keeping core inflation near target, something the Bank has failed to do for years. But even then Turner omits a key phrase: the Bank is asked to avoid ‘unnecessary instability”, but only “in pursuing its price stability objective”. The inflation target is paramount, and “unnecessary” variability here is clearly intended to be distinguished from the necessary variability required to achieve the inflation target. It isn’t an independent goal in its own right.
In fact, the whole of Turner’s quotation is pretty extraordinary once one remembers that this was the same Bank that marched the OCR up the hill in 2014, only to have to smartly march it back down again in 2015 and 2016. If that wasn’t “unnecessary variability” it is hard to know what would have been. And quite what leads Turner to think that a stronger economy, getting inflation back to target, would have led to “unnecessary variability” in output – when per capita growth (and even total GDP growth) has been anaemic by the standards of past cycles – is beyond me. But no doubt Graeme and his acolytes told Philip so.
In his conclusion, Turner observes
The main conclusion is that the monetary policy process at the Reserve Bank of New Zealand works well. This is hardly a surprise given the RBNZ’s distinction as a pioneer in much of modern central banking (e.g. the inflation-targeting framework, the careful attention given to an accountability regime for the central bank that actually works) and given its high standing today among its central banking peers.
As I said, he seems to have formed a favourable impression of the Reserve Bank 25 years ago, and at this late stage isn’t minded to reassess. If the Reserve Bank of New Zealand is still highly regarded among its “central banking peers” – which frankly I doubt – it can only mostly be because of that historical memory, of the pioneering days when – for better and worse – the Reserve Bank was genuinely innovative in monetary policy institutional design and banking regulation reform. Frankly, I doubt many overseas central bankers pay much attention to New Zealand economic data, or to the publications and speeches of our central bank. Why would they? And no doubt Graeme is fluent enough when he turns up at BIS meetings. Perhaps the biggest clue to what is wrong with that paragraph is the idea that we have “an accountability regime that actually works”. No one close to it thinks so (however good it looked on paper 25 years ago).
Turner’s final paragraph is as follows
A final remark, in conclusion. Results over the past few years speak for themselves. The RBNZ has helped steer its economy through several large external shocks. Because it has done so without becoming trapped at a zero policy rate and without multiplying the size of its balance sheet by buying domestic assets, it has retained more room to pursue, if needed, a more expansionary monetary policy than is available at present to many central banks of other advanced economies.
This is simply almost incomprehensibly bad. Inflation has been well below target, even in a climate of no productivity growth and lingering high unemployment. If New Zealand isn’t “trapped” by the zero bound, it is entirely because we’ve persistently had neutral interest rates so much higher than those almost anywhere else – which is neither to the credit nor the blame of the Reserve Bank – and so were able (belatedly) to cut interest rates more than almost anyone else. Because neutral interest rates are still, apparently, materially higher than those elsewhere, the Reserve Bank does have a bit more policy leeway than most other central banks when the next recession hits. But, contra Turner, it is no cause for complacency – no advanced country has enough room now – and no credit to the Reserve Bank.
It is a shame the Reserve Bank is reduced to publishing, and touting, a report like this in its own defence. When good old Uncle Philip, a fan of yours for years, swings by, it must be mutally affirming to chat and exchange warm reassuring thoughts. But as evidence for the defence his rather thin thoughts, reflecting the favourable prejudices of years gone by, and institutional biases against doing much about inflation deviating from target, isn’t exactly compelling evidence for the defence. Sadly, getting too close to Graeme Wheeler as Governor seems to diminish anyone’s reputation. It is a shame Turner has allowed himself to join that exclusive club.