Submissions to Parliament’s Finance and Expenditure Committee on the Reserve Bank of New Zealand (Monetary Policy) Amendment Bill close today. Despite my scepticism about the value of the process – given that the Bank and the Minister are already actively recruiting members of their tame Monetary Policy Committee – I did lodge a submission this morning.
The full text is here Submission to FEC Reserve Bank of NZ Amendment bill Sept 2018
Most of it covers ground I’ve dealt with here over recent months, albeit in more abbreviated form. There are two main aspects to the bill:
- the proposed change in the statutory goal of monetary policy, and
- the creation of a statutory Monetary Policy Committee.
On the former
The case for having active discretionary monetary policy is – and always has been – about cyclical stabilisation. We don’t need an active Reserve Bank to deliver broadly stable price levels over the longer-term. And nothing monetary policy can do makes any difference to unemployment in the longer-run. But there is a strong case for active monetary policy to limit the short-term downsides from severe adverse shocks – the Great Depression was the most stark modern example (and, indeed, it was the backdrop to the establishment of the Reserve Bank of New Zealand) but the argument holds in almost serious downturn. Monetary policy should do what it can to stabilise the economy, subject to a longer-term nominal constraint (eg price stability). And Parliament should be upfront with citizens about this (which is the way central banks typically try to operate in practice).
The formulation in the bill at present has a number of problems:
· the whole point of what discretionary monetary policy can do (not just here but around the world) is to avoid (or keep to a minimum, consistent with price stability) periods of significant excess capacity. Despite the attempt to argue otherwise in the Explanatory Note, “maximum sustainable employment” is not a measure of excess capacity. Unemployment is much closer to an excess capacity measure. It also has a considerably greater degree of historical and public resonance.
· the proposed wording treats employment as good in itself, whereas labour is an input (a cost, including to those who supply it). A high-performing high productivity economy might well be one in which people preferred to work less not more. By contrast, lower unemployment (people who want a job, are searching for it, are ready to start, but can’t find a job) is unambiguously desirable, to the extent possible.
· the wording makes no attempt to integrate the two dimensions of the goal, and
· it continues to suggest that active monetary policy is primarily about medium-term price stability. But we do not need monetary policy for that goal (a Gold Standard or something similar would do fine). Instead, medium-term price stability is more like a constraint (a vitally important one) on the use of monetary policy to keep the economy operating close to capacity.
Accordingly, I argue that goal should be worded as something like:
“Monetary policy should aim to keep the rate of unemployment as low as possible, consistent with maintaining stability in the general level of prices over the medium-term.”
It isn’t anywhere near as radical as it might seem to some. The working definition of “stability in the general level of prices over the medium-term” (1 to 3 per cent inflation, with a midpoint focus on 2 per cent) could be kept exactly as it now. But it is clearer, and better aligns with what we should look for from the Bank and from the new MPC. Keeping unemployment as low as possible really matters for individuals and their wellbeing. But this formulation also keeps clear that the Bank cannot go pursuing its own views on what the unemployment rate can or should be if medium-term price stability is jeopardised.
As for the proposed MPC
Establishing a statutory Monetary Policy Committee is a sensible, well overdue, reform. The New Zealand model, innovative in its day, was not followed anywhere else, and the existing model is also out of step with how we run almost every other public agency (and most private ones).
Nonetheless, the Monetary Policy Committee provisions of the bill as drafted are likely to achieve relatively little. They retain a far too dominant position for the Governor – out of step with the typical chief executive role in other Crown entities – including enabling the Governor to be very influential in the selection process for all other MPC members.
This legislation is an opportunity for more far-reaching reform, enhancing transparency and accountability and better aligning the governance of monetary policy with practice in open democracies abroad. Doing so would strengthen confidence in the institution, and would also increase the chances of attracting consistently good potential appointees.
There are a number of detailed suggestions to improve the bill, including
In the bill (proposed new section 63C(3) the internal members of the MPC must be a majority. It would be very unusual for a statutory decision-making body for a government agency to be comprised largely of executive staff. It confuses roles and risks undermining the value in creating a committee. It is also an unusual – although not unknown – in central banks abroad (in some cases, outsiders fill executive roles during the term of their appointment). A better model for New Zealand would be to have the Governor and Deputy Governor and three externals as members of the MPC. The Committee would, of course, be expected to draw on staff expertise, but as advisers (in the same way that, for example, experts in Treasury advise the Minister of Finance)
In the bill, all appointments (internal and external) to the MPC would be made by the Minister on the recommendation of the Board. This is a very unusual model in New Zealand public life, where the standard procedure – for many important and very sensitive roles – is for direct ministerial appointment (Governor-General on advice of the Minister). That model should also be adopted for the MPC, including for the positions of Governor and Deputy Governor. Again, such an approach is typical in other countries. It is consistent with the fact that members of MPCs collectively wield a great deal of power, and although voters have no way of holding them to account directly, they should be able to hold to account directly those who appoint the MPC.
As presently worded, the role of the MPC looks to be quite narrow (“formulating monetary policy” – a term not substantively defined, and possibly not even including OCR decisions). The MPC should be given explicit statutory responsibility for all aspects of monetary policy (including advice on the remit and, for example, foreign exchange intervention, liquidity provision, issuance of notes and coins), even if some operational aspects are then delegated by the MPC to the Governor. This issue may appear arcane, but will assume considerable salience if the effective lower bound on the OCR is reached in some future recession.
The transparency provisions around the MPC should be considerably strengthened, to require the publication of substantive minutes (including at least the numerical balance of any votes) and, with a suitable lag, the pro-active release of the staff papers submitted to the MPC. At present, aided and abetted by the Ombudsman (over decades), the Bank consistently refuses to publish any background papers until many years have passed (a striking contrast to the pro-active release of papers relating to each year’s Budget). Making these amendments would largely remove the need for the proposed Charter (which implies direct ongoing ministerial involvement in how the MPC is run, and could in future be used to degrade transparency provisions), and allow the MPC to evolve its own processes and culture over time.
I touch on provisions such as the proposed abolition of the age restriction on the Governor, provisions to avoid last year’s (almost certainly unlawful) “acting Governor” appointment while dealing effectively with the substantive issues, and the role of the Board.
The bill retains the Reserve Bank Board as the entity principally responsibility for holding the Governor to account, adding responsibility for holding the MPC to account. Successive boards have done this job quite poorly (more because of incentives and institutional design than because of individuals), and have tended to act as if their role is to defend and champion the Governor. It will be difficult to change that dynamic, and yet more important to do so with the addition of a statutory MPC and the potential tensions between the Governor and other members. The bill usefully provides for a more normal system in which the Minister directly appoints the Board chair. However, other helpful changes that could be considered include:
- providing the Board with specific (limited) financial resources of its own (at present it relies on totally on the Governor),
- removing the Governor as a member of the Board,
- renaming the Board the Monitoring and Accountability Committee (MAC), to be clear that the entity is a quite different sort of beast than a corporate board or a typically Crown entity board (the mindset most Board members bring to the role),
- making clear in legislation that the MAC is not itself part of the Bank, and is primarily responsible to the Minister and the public, and
- requiring the timely publication of the minutes of Board meetings and the pro-active release of (most) papers presented to the Board.
The Monetary Policy Committee provisions of this bill are unambitious and disappointing, especially when set against the expressed aspiration of a once in a generation update to the legislation to reflect the way in which the world (including central banking) has changed since 1989. Among the features of our age are a much degree of openness, a greater recognition of uncertainty and of the benefit of an open contest of ideas, and less willingness to build institutions based on a deference. This bill reflects almost none of that.
In considering the bill, I would urge the Committee to look closely at the experiences of open central banks in the United Kingdom, the United States, and Sweden (in particular). All are more open than anything envisaged in this legislation, and in the way the Minister has described his intentions for how the proposed New Zealand system should work. Each of those central banks has had strong individuals willing and able to challenge consensus views, and to debate monetary policy issues thoughtfully and openly. They do so in part by avoiding designing a system where the Governor (chief executive) has a too-dominant formal role. The current bill does not really address that glaring weakness in the New Zealand system.
Officials, especially those at the top of the Reserve Bank, appear to find a more open model threatening, and have made various arguments against moving towards such a model here. But the interests of officials – including the protection of their own position – are rarely that well aligned with the interests of New Zealanders. New Zealand has the opportunity to learn from the successful models abroad, in three very different countries, adapting the insights to the specifics of New Zealand (system of government, size etc). By doing so, Parliament would, over time, greatly strengthen the institution itself, and New Zealand processes around the design and conduct of monetary policy. We would all be better for such change.
This shouldn’t be a particularly partisan issue. Everyone should want a better, more resilient, better-governed institution handling monetary policy, and for the regime itself to command confidence across the political spectrum. I hope the select committee deliberations do finally prompt the Minister of Finance and the government to reconsider, to give up their small ambitions, and to embrace the idea of more far-reaching change and improvement in the way monetary policy is governed, contested, and accounted for.