A bouquet for the Government

They don’t deserve many, but this announcement this morning is unambiguously positive.

Cabinet papers will be proactively released, Minister of State Services Chris Hipkins announced today.

The move is part of the Government’s wider plan to improve openness and reflects its commitment to the international Open Government Partnership.

The Cabinet papers will be released no later than 30 business days after a Cabinet decision. This process will be in place for Cabinet papers lodged from 1 January 2019, Chris Hipkins – who is also responsible for Open Government – said. ……

“Cabinet papers will be released within 30 business days of the Cabinet decision unless there is good reason not to publish. If we can publish it, we will.”

It will, almost certainly, end up less good than it sounds.  But it is a start.    The official papers upon which our governors make their official decisions should be open to public scrutiny, with only a short delay.  As the Minister’s press release notes

“This change is consistent with the spirit of the OIA which states that information should be made available unless a good reason exists for withholding it.

“Proactive release of official information promotes good government and transparency and fosters public trust and confidence in government and the public agencies.”

Of course, only time will tell how (a) this government chooses to run the system, and (b) whether future governments regard themselves bound by the newly-established practice (the law isn’t being amended to require pro-active release, but it probably should be).  I don’t suppose we will ever see any Cabinet papers that might deal with awkward issues around the relationship with the People’s Republic of China, or PRC interference in New Zealand public and commercial life.   Perhaps we shouldn’t either.  Some things – a few –  need to be not only deliberated in secret, but to able to have the relevant considerations and supporting evidence kept under wraps for a longer period.  And, reasonably enough in my view, they won’t be releasing papers relating to recommendations for honours (they say they will withhold papers relating to appointments as well, and that is more concerning).

What worries me a little more is that

Individual ministers will have responsibility for releasing Cabinet papers, which will be subject to an assessment to decide if there are good reasons to withhold any of the information.

If individual ministers are making the decision, how will we be confident that all ministers are applying more or less the same standard?  There is no suggestion of a central monitoring process, and there will be more or less ornery ministers, more or less politically uncomfortable issues, weaker and less confident ministers, and –  as our arrangements have developed –  ministers who hold ministerial warrants but aren’t part of Cabinet, or even of the government itself.  Will, for example, the Greens ministers be bound by this new Cabinet practice?

But if the principle is that the official papers upon which our governors make their official decisions should be open to public scrutiny, with only a short delay, shouldn’t this principle be extended –  either voluntarily, or mandatorily –  to other state agencies that make major policy decisions, that attract considerable public interest and scrutiny?

One could readily extend the principle to the boards of all Crown entities (subject to similar specific exclusions as the Cabinet will apply to itself).

But, of course, the entity I particularly had in mind was the Reserve Bank.   The Bank’s longstanding line has been that, even though they make vital economic decisions that can materially affect the short to medium term performance of the economy, it would be costly, damaging, and confusing to release the background papers that the Governor receives prior to making his or her decision.  After all, they tell us, there is the MPS or the press release, and the Governor holds a press conference once a quarter.  What more do we need to know, they argue?   They simply generally refuse to release background papers –  although I did once manage to get them to release some that were ten years old (to make the point that, at most, there is a time dimension to any decision on whether material can be released under the OIA).

But those arguments apply –  if at all –  just as much to decisions made by Cabinet, often on much more complex and sensitive issues than those the Reserve Bank deals with.  Cabinet decisions are announced by ministers, the PM holds press conferences, and ministers are generally pretty accessible to the media  (more so than most Governors).  But the Cabinet has rightly decided to release (most) Cabinet papers, and recognises that doing so is right and proper in a free and open society, and will over time enhance confidence.

The same should go for the Reserve Bank.  If the Governor is serious when he talks about being open and transparent –  as he seems to be on all matters that he isn’t responsible for –  he’d take the lead on this issue, and announce that in future the big folder of background papers prepared going into each Monetary Policy Statement, together with the (anonymised) written advice of his advisers on the OCR decision, would be routinely released (perhaps with a small number of redactions) six weeks after the OCR/MPS announcement to which they relate.  Six weeks is long enough that plenty of new data will have emerged since the papers were written (indeed, it will be close to the next OCR decision), and short enough to still be of use/interest to analysts in understanding the Bank’s thinking (recall that we still have no idea what analysis they used last year when they announced they were assuming half of the building associated with Kiwibuild houses would be offset by reduced other residential building activity).

And if the Governor won’t take the lead, the Minister of Finance should insist on this sort of approach as part of the legislation and procedures around the establishment of the new statutory Monetary Policy Committee.

Most likely the Bank will continue to fall back on spurious arguments about potential damage to the “substantial economic interests of New Zealand” (an OIA ground that hasn’t been well-tested), or risks of confusion.  Those arguments are just wrong, and risk sounding (or perhaps are) self-serving: powerful bureaucrats protecting their particular monopoly on information/advice.  Cabinet has been willing to step beyond those arguments, and we should expect the Reserve Bank Governor –  a very powerful unelected policymaker –  to be even more ready to do so (being, after all, unelected and thus with less legitimacy).  If he doesn’t do so willingly, he should be left with no choice.


Reserve Bank Amendment Bill – a submission

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:

  1. providing the Board with specific (limited) financial resources of its own (at present it relies on totally on the Governor),
  2. removing the Governor as a member of the Board,
  3. 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),
  4. 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
  5. requiring the timely publication of the minutes of Board meetings and the pro-active release of (most) papers presented to the Board.

I conclude

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.

Towards an MPC

A week or so ago, advertisements appeared in the major newspapers inviting applications from people wishing to be considered for appointment as external (non-executive) members of the Monetary Policy Committee.   Should you wish to apply, the advert is here, with applications closing on Friday.

All of which is quite remarkable.  The Monetary Policy Committee is to be created by legislation currently before Parliament,  and not expected to be passed until the end of the year (the select committee isn’t due to report back until early December). The appointments are not expected to take effect until April next year.  In fact, submissions on the Reserve Bank of New Zealand (Monetary Policy) Amendment Bill themselves also close on Friday.   The select committee process is supposed to involve members looking carefully at the details of the legislation, considering public submissions, and recommending any refinements or amendments the committee considers appropriate.  But you would have to wonder what the point of submitting is, at least on the MPC structure, powers etc, when the appointment process for members is already well underway.

As I’ve previously highlighted, one of the bizarre aspects of the proposed model is that the Reserve Bank Board (no doubt heavily influenced by the Governor, who is a member of the Board) get to control the appointments.  Appointees will, finally, be signed off on by Cabinet and appointed by the Minister of Finance, but the Minister will only be able to appoint people nominated by the Board.  Most of the Board members have no, repeat no, expertise in monetary policy (including its governance), and all but one of them were appointed by the previous government.  It is a weird abdication of responsibility, for a key aspect of short-term economic policy, not seen (as far as I’m aware) in any other major government appointments.  It is extraordinary that the Minister of Finance cannot directly appoint people he has judged appropriate to the role –  people who can, by their choices, have a big influence on the short-medium course of the economy.   The Minister of Finance (and his colleagues) are, after all, the only people we citizens can actually hold to account –  kick out – if things go wrong.

We’ve seen this sort of rather premature process from the Board previously.  Last year, they were advertising for candidates for a new Governor, with applications closing well before the election, even though the Board –  like everyone else –  knew that the then Opposition parties were promising reform of the Reserve Bank, including legislative change.

This time one must presume they have the approval of the Minister of Finance for kicking off the recruitment process.  After all, the advert is quite specific that there will be three external appointees, and that is a decision only the Minister can make (the legislation specifies only a range (2 or 3 externals)).  That, incidentally, guarantees that there will be four internal members –  the maximum allowed in the legislative provisions, and the bill requires an majority of internals.

That said, the process seems to have been rather rushed.  Applications are open for only two weeks, and when I contacted the recruitment firm the Bank’s Board is using to ask for the information pack and related detail, the initial response was that they didn’t yet have all the material from the client.  It took six days before the material finally arrived.

There was some interesting material in the advertisement

External MPC members need not have expertise in monetary policy or macroeconomic theory.

This is the more moderate version of what I was told the Governor had said the other day at the INFINZ function, that he didn’t want “you economists” (last I looked that was the Governor’s own background) because “we need different thinking”.

The bill itself says

The Minister may only appoint as an internal or external member a person who, in the Minister’s opinion, has the appropriate knowledge, skills, and experience to assist the MPC to perform its functions (for example, in economics, banking, or public policy).

Which is fair enough I guess, but I would hope that when the Minister finally comes to make appointments he insists that at least one of the externals in fact has a fairly strong background in monetary policy and macroeconomics.   Even the Bank’s Board –  which has no power over monetary policy at all –  has usually had such a person.  If there is no such person on the MPC, it will simply confirm from the start even more strongly what I have been arguing, that the new structure is likely to be ineffective, governor-dominated, and resembling in many ways the sort of system the Bank has had in place for the last 15 years or so (when a couple of externals  –  almost always with no economics background –  have participated in monetary policy deliberations, and provided an OCR recommendation, but have had little real influence most of time, and no accountability: any value was mostly in passing on a specific class of business anecdote).

What sort of people is the Board looking for?

External MPC members will require:

  • Exceptional intellectual acumen and communication skills
  • Experience exercising sound judgement to make effective decisions, in environments reflecting high levels of complexity and uncertainty
  • Capacity to engage with complex economic issues and make contributions which draw upon a range of relevant professional, educational and life experiences
  • Absolute integrity, reflecting genuine independence, rather than solely acting as a ‘voice’ for specific sectors or interest groups
  • The ability to operate in a manner consistent with the highly confidential nature of MPC decisions.

On the second to last of those, even the bill is a bit stronger

A person must not be appointed on the basis that the person represents a particular industry sector.

It would be quite concerning if anyone appointed to the MPC saw themselves as a representative or voice of a sector (even if not “solely”).  All members must surely be expected to operate solely from a national perspective.

But what of the first set of criteria?  I’m always a bit sceptical of adverts seeking “exceptional” anything, as there are very few people with such “exceptional” qualities anywhere.  Of the Reserve Bank’s existing senior management and Board, of those I’ve had anything to do with there are plenty of moderately capable people, but none whom I’d describe as having “exceptional intellectual acumen”.  Why does the Board think they are likely to attract such people to a part-time role, in which they will have little ability to influence policy, no independent resources, and (from what we’ve been told previously) no ability to articulate their views openly?  Oh, and not to mention people willing/able to devote 50 days a years in a part-time capacity at public sector board remuneration rates?

I’m also puzzled at the suggestion that MPC members should need “exceptional communications skills”.     Again, of management or the Board, only the Governor could possibly be considered to have such skills, and even he is often rather a loose cannon.  But more importantly, the Reserve Bank fought hard –  and the Minister sadly endorsed – a model in which MPC members will not be free to articulate anything other than an agreed MPC position on policy.  They won’t even be able to have their personal perspectives clearly recorded in the minutes of the meetings, let alone make speeches or give interviews that might seek to advance thinking or articulate a minority position, That is quite different from the situation in more open systems, notably those in the UK, the US, and Sweden: systems which function well, without any of the problems the Reserve Bank management (protecting their personal position) have tried to worry people with.

It will be interesting to see what sort of people the Board and the Minister come up with, assuming that Parliament eventually passes legislation along the lines of the current bill (and bear in mind that we have a minority government again).  It is hard to see why the roles –  probably little more than silent adjuncts to the Governor – would be attractive to really good people, or who will really be free to take them up (even an academic –  apparently not wanted by the Governor –  might struggle to commit 50 days a years, spread over the year, not just in the long summer vacation).

Potential conflicts of interest have always been a bit of an issue, and the main reason I asked for the information pack was to see how they proposed to handle that issue.  Frankly, the material I received –  which included a draft Code of Conduct –  suggested they haven’t really thought sufficiently hard about it yet.   The conflict of interest provisions look a lot like those I used to be subject to as a staff member participating in the OCR Advisory Group, but don’t really grapple adequately with the situation of part-time externals, presumably earning their living (or occupying their time) mostly doing other, non Reserve Bank, stuff.  For example, there is (reasonably enough) a prohibition on

Members must not be personally or professionally involved, directly or indirectly, in regular trading in financial markets in which the Bank has, or might have, a significant influence. This includes domestic wholesale money, bond and foreign exchange markets, interest and exchange rate futures, options and swaps markets, instruments linked to such markets, equities listed on New Zealand exchanges and prediction markets related to those issues in which the Bank might have a significant influence.

(If only the predictions market had not, in fact, been killed off by the previous government).

And under the legislation public servants and directors/employees of entities regulated by the Bank will be probibited.

But there is no sign that, say, someone in my position would be disqualified or conflicted (in terms of this specific policy), despite being a trustee of two superannuation schemes and devoting a fair chunk of my time to, at times quite vocal, commentary on aspects of economic policy.  I’d certainly regard both of those sorts of involvements as disqualifying –  even scrupulously observing confidentiality –  and I would expect most Monetary Policy Committees in other countries would do so too.

(And in case anyone is in any doubt, I have no interest in the MPC positions myself. They are set to be ineffectual figleaf positions.)

And so it will be interesting to see what people they finally manage to attract, both in the first round, and a few years later when the novelty has worn off.  A smart (but deferential) semi-retired person would probably fit the bill quite well, but since the government and the Bank have been clear they don’t want people who might rock the boat, and they apparently aren’t keen on economists, and since even the externals together will be a perpetual minority, you wonder why someone good would be interested.   Pocket money probably shouldn’t be the motivation, at least if the government were serious about putting in place a strong, well-functioning, MPC.  Of course, as it is, there is no evidence of such intent.

What is “formulating monetary policy”?

Under clause 8 of the current Reserve Bank of New Zealand Act, the primary function of the Bank is “to formulate and implement monetary policy”.   All powers rest with the Governor personally.

I did a lot of work over the years on issues around monetary policy, both bigger picture stuff around goals and governance, and on the detailed implementation arrangements (the design of the OCR system itself, and various supporting liquidity management arrangements).  I sat on whatever internal advisory committees we had for the best part of 25 years.  I wrote this piece, for example, and this one.  So I know whereof I speak.  But I don’t recall anyone ever making much of the distinction between formulation and implementation, or getting a legal opinion on which of “formulate” or “implement” mattered in what particular context.  Why would we have?  All the powers rested with Governor, and there was no particularly need to clearly delineate formulation activities from implementation activities, either in the present, or in thinking about contigency planning.

In practice, and on a day to day basis, under the current system the two activities are fairly clearly divided: monetary policy formulation is, in effect, things up to including the OCR decision, while implementation involves the detailed management of market conditions to deliver something akin to the chosen level of the OCR.

But the broad parameters of an OCR system itself –  indeed, even the decision to have an OCR (we’ve only had one for 19 years) –  doesn’t fall neatly on either side of a line between “formulation” and “implementation”.  And then there is foreign exchange intervention for monetary policy purposes. Perhaps things have changed, but when I was there decisions that the preconditions for intervention were right (the “traffic light system”) were made by the Governor in the OCR Advisory Group context, while (rare) decisions to actually intervene were made by the Governor directly liaising with the Financial Markets operational department.

It doesn’t matter much at present, because all powers vest with the Governor, and how or whether he takes advice on individual bits of his monetary policy responsibilities is entirely up to him.

But in the Reserve Bank bill introduced last week splits those two functions apart.

Under the amended clause 8, it is intended that

The Bank, acting through the MPC, has the function of formulating a monetary policy….

and, in section 8(3)

The function of formulating monetary policy includes deciding the approach by which the operational objectives set out in a remit are intended to be achieved.

And in a new clause 9, we read

The Bank has the function of implementing monetary policy in accordance with this Act.

And later in bill, in the new clause 63B we read

The MPC must perform the function of formulating monetary policy in accordance with this Act

Neither “formulation” nor “implementation” is further defined in the Act at present, and I can’t see any attempt to add more specific definitions in the new bill, other than a circular definition which says that

formulating, in relation to monetary policy, has the meaning set out in section 8(3)

Which, to say the very least, isn’t very specific.

I have two concerns about this, which boil down to much the same point I was making in a post last week: this bill would results in a committee which is likely to be nothing more than figleaf, and which leaves all substantive power in the hands of the Governor (and his chosen management team).  That is likely to be even more so in the next serious recession, when the limits of conventional monetary policy (how far the OCR can be cut) are likely to be reached.  If that is the Minister’s intention, he should be honest enough to say so. If he is serious about building a stronger, more open institutions, not totally controlled by management, he needs to look again.

I suspect the intention of the wording of the bill is that OCR decisions (and only those decisions) should be made in, and by, the MPC.   That would be consistent with the explanatory note to the bill, which twice refers (loosely) to the goal being to institute an MPC “to make decisions on monetary policy”.

But the OCR itself is (rightly) not referred to in the Act.  And clause 8(3) only talks, very loosely, about “>deciding the approach by which the operational objectives set out in a remit are intended to be achieved”.   Couldn’t a Governor argue that not even the specific OCR decision is covered by that mandate?   The MPC might decide that it thought an inflation target should be achieved over, say, a two-year forecast horizon, but it isn’t clear why the Governor couldn’t insist that even specific OCR decisions were a matter for him alone, provided they weren’t inconsistent with the MPC’s “approach”.   That interpretation might be buttressed by the proposed wording around Monetary Policy Statements.  MPSs need the approval of the MPC, but the specific material an MPS has to cover is  (emphasis added)

specify the approach by which the MPC intends to achieve the operational objectives [and] state the MPC’s reasons for adopting that approach

I’m not suggesting such a departure is at all likely under the current Governor, but legislation should be written in a way that is robust, including to power-grabbers (either the Governor, or the MPC).   Specifically, it would be quite inappropriate for the Governor to be able to assert that OCR setting was purely his responsibility, and that MPC was only there to provide advice, even a decision, on the broad “approach” to achieving the remit goals.  It would make a mockery of the rhetoric around reform.
Similarly, I don’t think it should be acceptable for the Governor alone to decide to, say, scrap the OCR system itself (which would appear to be possible under the current legislative drafting) or to modify the system substantially in ways that led to much greater (or much reduced) volatility in key financial prices.  I’m not even convinced that choices around the policies the Bank adopts on what sort of collateral to take in its market operations, implementing monetary policy, should be matters for the Governor alone.  Such decisions have the potential to materially affect monetary conditions, and the achievement of the remit goals set for the MPC by the Minister of Finance.   At a bare minimum, the Governor should be required to consult with the MPC on such matters, and have regard to any comments or representations on such matters they wish to make.  Similarly, I don’t believe it should be acceptable for foreign exchange intervention decisions (the traffic lights) done for monetary policy purposes (or, indeed, the policy on such matters) to be made outside of the context of the MPC.

These issues might seem of second-order importance in normal times.  They have the potential to become hugely important in crisis periods, or in circumstances in which the limits of the OCR have been reached (recall that the Bank itself reckons the practical limit is only 250 basis point from here).  In those circumstances, if the MPC has power only over the OCR –  and perhaps not even secure statutory power there –  it will be all-but neutered; irrelevant to the real choices that the Bank management (and perhaps the government) is making.

Thus, for example, decisions to:

  • intervene heavily to drive down the exchange rate,
  • decisions to undertake substantial QE,
  • decisions to intervene to control yields on interest rate swaps

(all options touched on in the Bank’s recent article)

as well, potentially, as decisions around any limits on the volume of notes and coins, or on the conversion rates between settlement balances and notes and coins, would have potentially very large consequences for monetary conditions, and for the ability to meet the remit target

but I suspect the Governor would argue that they are all matters for him to decide, not choices for the MPC.

If the Governor successfully made such an argument, it would be unfortunate on at least two counts:

  • substantively, since the whole argument (made in the Explanatory Note, and in the Minister’s speech) is the benefits of diverse perspectives.  Such perspectives would be likely to be more valuable usual in an unconventional environment, which management had not previously experienced,
  • transparency.  The bill envisages requiring that some (pretty neutered) MPC minutes will have to be routinely published.  But if the important stuff of monetary policy is still being decided by the Governor –  not just him block-voting management in the committee – even what limited gains we might hope for around transparency and accountability will be foregone.

Of course, one way of looking at all this is to observe that if I’m right and the new legislation just cements in effective control by the Governor (through his management majority of the committee, and his likely clout with the board regarding the handful of externals) perhaps it doesn’t really matter very much.    Good people are likely to be reluctant to accept appointment, and that would simply be reinforced during a period when the OCR itself was neutered.

But, presumably the Minister doesn’t accept that interpretation (after all, he talks about the benefits of committees, diverse perspectives etc).  Nor, presumably, does the Opposition –  who talk up the risks to the independence of the Bank.  The legislation should be better-worded:

  • it should be explicit that the MPC has responsibility for decisions on the OCR or any official interest rate,
  • it should be explicit that the MPC has policy responsibility for matters to do with foreign exchange intervention done in support of monetary policy, and for policy parameters around domestic liquidity management,
  • it should be explicit that policy matters to do with, for example, QE should be matters for the MPC
  • operational decisions on matters within these mandates would be matter for the Governor, but accountable to the MPC,
  • and, at very least, the MPC should be free to make written representations on any other aspects of Bank responsibility which, in their view, are likely to affect their ability to deliver the remit objectives.

Consistent with that, of course, the MPC should have a clear majority of outsiders, and a clear majority of the members (preferably all) should be directly appointed by the Minister of Finance, without the involvement of the Bank’s (ill-qualified, illegitimate, and unaccountable) Board.

Treasury advice on rushing the Reserve Bank bill

From a Treasury paper to the Minister of Finance, written in March and pro-actively released yesterday (emphasis added)

Legislative Timeline
14. Officials’ recommended timeline, set out in Annex 2, would see drafting instructions issued in tranches from the end of April, and Cabinet approval of draft legislation by the end of August. Consistent with previous decisions, the recommended process does not allow for public consultation on an exposure draft of the legislation prior to the Bill being referred to select committee. You should note that this timeline is indicative only, and will depend on how quickly decisions are made, securing time in the House and the length of the select committee process.

15. Officials’ proposed timeline will allow the first reading of the Bill when Parliament resumes in the first week of September. Assuming the normal six month select committee process, this would enable Royal Assent by the end of April 2019.

16. The bid for space on the legislative agenda suggested the legislation would be passed this year. However, we do not recommend passing the legislation in 2018. Doing so would require shortening either the policy and drafting process, the select committee process or both. Reducing the time for either of these processes risks compromising the quality of the final legislation, and will make it harder to build public support for the reforms. A substantive select committee process that builds public support is particularly important given that the changes are to one of New Zealand’s major economic frameworks and that only limited public consultation was conducted during the policy development process.

17. If you want to pass legislation in 2018 and run a full select committee process, the policy and drafting process would need to be completed by early June. While this is not impossible, it would greatly increase the risks around introducing legislation. Risks could include introducing legislation with provisions with unintended consequences or new processes that are unworkable. This would make significant amendments likely during the select committee and the committee of the whole House stages.

Since the bill introduced this week has to be reported back from select committee by 3 December, it seems likely the government wishes to pass the bill this year, contrary to Treasury’s fairly-trenchantly worded advice.

I’m a little torn.  I’m keen to see a statutory committee in place, and I don’t usually put much store in Treasury’s economic analysis (and see Eric Crampton on the limited number of economists they are recruiting), but they should know something about policy development and legislative processes.  And they clearly think this legislation is being rushed, in an unnecessary, inappropriate, and risky way.

Debating the Reserve Bank bill

The first reading debate yesterday on the Reserve Bank amendment bill wasn’t exactly Parliament at its finest.    There was plenty of courtesy on display (with one exception, which I’ll come to below) but not much rigour, and not much regard for the importance of building strong and robust, open and transparent, institutions.

The National Party voted against the first reading.  According to the party’s finance spokesperson, Amy Adams, they support the move to establish a statutory Monetary Policy Committee

I want to deal reasonably briefly with the monetary policy committee, because that is an area where we see a lot of merit in what has been proposed. Of course we want to go to select committee and see what comes in, and we may well find issues that need exploring, but, at this stage, I think the monetary policy committee makes good sense.

but they oppose the change to the statutory goal of monetary policy.  It isn’t entirely clear from her speech read together with those of her colleagues whether they oppose the change because it will make no difference, simply reflecting what the Bank already does, or because they think it will make a difference, and they don’t like the difference it might make.    The former seems a very weak ground on which to oppose legislation: it is a good thing, not a bad thing, to ensure that legislation and practice are kept in line (arguably, for example, the Reserve Bank of Australia’s and the Federal Reserve’s legislation should have been updated long ago).

As I noted in yesterday’s post, I don’t much like the formulation of the statutory objective for monetary policy contained in the bill.  That isn’t because I think it will be deeply damaging, just that the government and their advisers haven’t done a very good job in capturing what it is that we should expect from an active discretionary monetary policy.  National Party members were at pains to point out that there is no long-term tradeoff between price stability on the one hand and employment/unemployment on the other hand.  And, of course, that is quite right.  It has been well-known for decades.   But equally well-known –  and for even more decades –  is that there is a relationship in the shorter-term.  It is why we have an active monetary policy.     But there is no sense of that distinction in the drafting the government has brought before Parliament.

Thus, I repeat the suggested wording I included in yesterday’s post

“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.”

or the sort of wording I proposed last year when I was a discussant at the seminar where Labour launched its policy.

To promote and safeguard price stability and the highest degree of employment [or lowest degree of unemployment] that can be achieved by monetary policy

That drew heavily on the language used in the Reserve Bank Act in the 1950s, introduced by a National Party finance minister.

One wants the Reserve Bank to do all it can to keep unemployment low, but only to the point where that is not in conflict with medium-term price stability.  In severe recessions –  mostly what we worry about, since these are human lives that are scarred –  “all it can” is quite a lot.  I don’t think the government has the wording right, and the National Party is right to push back, but if they are as serious as they say about working constructively in the select committee, it should be possible to find better wording which reflects the signicant short-run potential of monetary policy, and the very limited medium to long-term potential to do anything other than maintain price stability (or some similar nominal goal).

The complacency of the National Party probably shouldn’t have surprised me, just coming off nine years in government, but it did.    There were ludicrous claims –  from one backbencher old enough to know better – that for 30 years “the economy has gone incredibly well”, odd suggestions that the inflation target and price stability were themselves in conflict, and more specific ones about about the excellence of the Reserve Bank’s stewardship, even the suggestion that the new Governor will do a “superb job”.  Perhaps they have forgotten already that it is only a few weeks since the Opposition leader had a press statement out criticising the Governor?   Perhaps they are unbothered by past debacles like the MCI, or more recent episodes where the single decisionmaking Governor started lashing out at his critics, while refusing to ever substantively engage on issues?

But perhaps the most disconcerting claim was that there had never been an issue around unemployment and monetary policy in New Zealand.   On the Reserve Bank’s own numbers New Zealand went through seven years of a negative output gap (2008 to 2015), core inflation has been below the target focal point for eight years now, and the unemployment rate was above the Bank’s own estimate of a NAIRU for eight years (only dropping down to around that level in the last year or so).    Now clearly that was a failure in terms of the objectives set for the Bank, even without any sort of explicit employment/unemployment objective; on average monetary policy should have been run with lower real interest rates over much of that period.  But it seems to me that there is a reasonable argument to be made that had the Bank been obliged to, say, use monetary policy to keep the unemployment rate as low as possible, consistent with medium-term price stability, we might have had slightly better outcomes –  notably for those people who were involuntary unemployed, a scarring experience, during that period.

Oddly, the Minister of Finance never makes this argument –  consistent with his refusal ever to disagree with, or criticise, the Governor when he himself was in Opposition.  He should.   The experience of the last decade isn’t greatly to the credit of the Reserve Bank.  Perhaps they mostly had the best of intentions.  But they did poorly, and real people suffered as a result.    A reorientation of the target, focusing a bit more on the short-term stabilisation aspects, without sacrificing medium-term nominal stability, with strong reporting requirements –  and the right people –  could have made some useful difference.   (And, to stress that I’m not going to be tarred as some inflationista, in my ideal world the inflation target itself would be lower than it is.)

I wanted to pick up comments from two other speeches.  The first was from Chloe Swarbrick of the Green Party.  Whatever my differences with the Green Party, they deserve considerable credit for being the first party to call for a statutory Monetary Policy Committee, and historically they have also put a lot of emphasis on securing greater openness and transparency from the Reserve Bank (and used to greatly annoy the Bank by regularly requesting copies of Reserve Bank Board minutes, inadequate as they are).

In the course of her speech yesterday she made this comment

I think this piece of legislation, this bill, is a fantastic starting point for providing greater transparency and accountability for one of our most fundamental institutions.  This is, ultimately, about democracy.

If only that were so.   At very best, in respect of the Monetary Policy Committee, it is a baby-step in the right direction.  More realistically, it is a step away from accountability, and towards more power for unelected people (not even technocrats) with no visibility, no public accountability, and a majority of whom will have been appointed by the previous government.

For all its weaknesses, one feature of the current system is that it is very clear who should be accountable when the Reserve Bank gets it wrong, or even makes a controversial call that reasonable people differ over.  It is the Governor.  Effective accountability isn’t very strong, since the Board is supine, Ministers typically afraid of openly disagreeing with Governors, and market economists often cowed (either by threats from the Governor –  as in the Toplis case –  or more generally by the need to maintain relationships, access, and so on to an entity that regulates their employer).  But responsibility –  credit and blame –  is clear.      The same goes for good monetary policy committee systems, such as those in the UK, the United States, or Sweden  (actually, the same goes for Parliament itself, or even your dysfunctional local council –  there is individual responsibility).   But recall that the Minister of Finance has already said that he wants decisionmaking to be by consensus, no public record of who is dissenting and why, no opportunity for MPC members to articulate their views publicly, and so on.  We’ll have published minutes, which looks on paper like a small step forward, but with the amount gagging the Minister seems to envisage, it is unlikely to be a material win for transparency.    It looks a lot like a fig-leaf.        Not only will accountability be diffused and weakened –  in a quite unnecessary way – but these closed systems weaken any incentive for anyone appointed as an external member to invest heavily in the process. Free-riding, going along with the Governor as much as possible, will offer the best risk-return strategy (after all, challenge the Governor and you could be sacked, or not reappointed, and there is no opportunity for your views –  in an area of huge uncertainty –  to get a public airing.

And what of democracy?   The Governor was appointed by the Board –  oh, the Minister took the name to Cabinet, but he could only take the name proposed by the Board (or tell them to go away and come back with another name of their choosing.   The Board –  when the Orr appointment was made –  had all been appointed by the previous government (clearly out of sympathy with any sort of employment focus).  The current Deputy Governor was appointed by the previous Governor –  him of silencing critics, undershooting inflation etc –  and his supine board.  Both these appointees will be members of the new MPC.   The one or two new internal appointees will be appointed by the Minister, but only on the recommendation of the Board, who in turn will be guided by the Governor.    As I noted yesterday, the external appointees will also be chosen by the Board and the Governor (and recall that the Governor is on the Board), subject to an effective gubernatorial veto.  These appointments won’t be made until next year, but even by early next year, a majority of the Board members –  shocking track record, no expertise in the field, no accountability or scrutiny at all – will have been appointed by the previous government.

That isn’t democracy.  You couldn’t even call it rule by technocrats or philosopher kings, since the Board members are themselves just a bunch of company directors, academics etc, with no expertise, no legitimacy, no mandate.  And yet the Labour Party thinks –  apparently with support from both National and the Greens –  that these people should decide who makes monetary policy, the principal lever of short-term stabilisation policy.  I believe in the importance of democracy.   This isn’t it.

It is simply normal practice to have major appointments made directly by the relevant minister (or Cabinet, or on advice by the Governor-General).  It is strikingly abnormal to have appointments to major discretionary roles –  in central banks, or elsewhere in government –  so much out of the hands of elected politicians.  It would be a material step backwards, especially given the weakened accountability the government is proposing.  The National Party spokesperson is apparently worried that external members might be political hacks or under political pressure.  On the one hand, the Governor (at present) is probably much more susceptible to pressure, since he has lots of other battles to fight, including around his financial stability responsibilities. But perhaps more importantly, the dominance of politically-appointed decisionmakers is the norm in central banks abroad.  Those countries manage macroeconomic stability just fine.  It is also the norm in New Zealand –  I devoted a whole post to go through other roles.  Politicians appoint the Police Commissioner, members of the Commerce Commission, the Parole Board, the Governor-General herself, and all individual judges.    There is no good reason why appointments to key, powerful, Reserve Bank roles should be different: ministers should appoint directly, and thus be fully accountable for, people who wield such power on our behalf.

The final contribution to the debate that I wanted to comment on was that of the ACT Party, David Seymour.   Whenever I’m tempted to consider supporting ACT, all I need do is listen to one of Seymour’s speeches.  Here are some lines from his speech yesterday.

Thank you, Madam Assistant Speaker. I rise, on behalf of the ACT Party, in opposition to this bill—this piece of ministerial vanity and economic vandalism.


Could it be that this is not just dumb policy; this is actually evil policy. This is an erosion of the independence of the central bank. This is the current Government attempting to take control of the printing presses—not quite Venezuelan style; just in a sort of smaller capacity than they’re used to. It is a way that this Government will be able to influence the supply of money, and I bet this House that, when this is place, and when their committee is making the decisions, we will no longer have independent monetary policy; we will have a pattern that will be detectable in a few electoral cycles, which will tell us that the money supplied goes up and inflation goes up and the economic sugar hit comes out right before an election, and then, once the election is gone, they take the punchbowl away and the New Zealanders get the economic instability that the Reserve Bank Act was designed to take away.

This is a black letter day in New Zealand lawmaking. The Minister either has no idea what he’s doing or he has every idea what he’s doing.

Reasonable people can debate the merits of altering the statutory objective.  Reasonable people can debate the design of a committee system.  Perhaps reasonable people can even debate whether a committee is a good idea, although we use them in almost every other aspect of public (and private –  company boards, tennis club committees, church synods etc) life.  But a contribution like this says more about the speaker than it does about the issues.    And, rightly or wrongly, there is just no sign in market pricing (eg gaps between conventional and indexed bonds) that the market shares Mr Seymour’s fears.

One hopes that Finance and Expenditure Committee deliberations will prove constructive, and that the government will be open to amendments.  Given that the chair and deputy chair of the committee are both part of the government (both holding Under-Secretary positions), I’m not that optimistic, but we’ll see.  I did notice one National Party speaker yesterday praising the committee chair (Michael Wood), and Wood’s speech in the debate was probably the best of them, so time will tell.

Reserve Bank of New Zealand (Monetary Policy) Amendment Bill

The first reading of the Reserve Bank of New Zealand (Monetary Policy) Amendment Bill is on Parliament’s order paper for today.      This bill is designed primarily to give effect to the policy decisions the Minister of Finance announced a few months ago, to change the statutory objective of monetary policy, and to create a statutory Monetary Policy Committee responsible for the conduct of monetary policy (details of which were set out here and here).

There are, however, some other changes proposed.  In particular, there seems to have been –  at last –  a recognition that the process used last year to appoint Grant Spencer as “acting Governor” was probably not lawful.   The proposed amendments would deal with any similar situation (created by the timing of an election) by allowing the extension of the term of an incumbent by (or a temporary appointment for) up to six months.   The ability to extend terms seems sensible (provided it can be done only once), although I’m less sure about the proposal to appoint a new person as Governor for six months.  But individual vacancies should matter less under the new model (at least as regards monetary policy) because of the move to a statutory committee.

In addition, the bill sensibly proposes to remove the age limit (age 70) for the Governor.   There was a strong case for some age limit with a single decisionmaker (given the extensive powers and the extreme practical difficulty of removing someone who was in clear mental decline) even if age 70 was probably now too young.  With a shift to a committee decisionmaking structure (at least for monetary policy) the issue becomes somewhat less important.  However, for now at least, the Governor still will wield enormous power around bank and non-bank financial regulation, so I’m not totally comfortable with the change.  Higher court judges, for example, must retire at 72.

There are lots of detailed provisions in the bill. some of which are sensible, and others fairly problematic. I will be making a submission to the select committee, and so will cover many of the issues in more detail then, with the benefit of a bit more time to reflect on how the specific provisions might work.

In the rest of this post, I wanted to come back to the two big changes that are being proposed.

I’ve been sympathetic for some time to the addition of a real economy dimension to the statutory objective for monetary policy.  The only case for active discretionary monetary policy is –  and always has been –  cyclical stabilisation.   We don’t need a Reserve Bank to deliver broadly stable price levels over the longer-term, and even if we have a Reserve Bank it doesn’t need to be active.  But there is a case for active monetary policy to limit the downsides from severe adverse shocks to money demand or aggregate demand –  the Great Depression was the most obvious example, and indeed the backdrop to the establishment of the Reserve Bank of New Zealand.  Monetary policy should do what it can, subject to a longer-term nominal constraint (eg price stability).

I’m less keen on the specific formulation in the government’s new bill

The Bank, acting through the MPC, has the function of formulating a monetary policy directed to the economic objectives of—

(a) achieving and maintaining stability in the general level of prices over the medium term; and

(b) supporting maximum sustainable employment.

That formulation has a number of problems:

  • the whole concept of what monetary policy can do is to avoid (or keep to a minimum, consistent with price stability) periods of excess capacity.  Despite Treasury’s attempt to argue otherwise in the Explanatory Note to the bill, “maximum sustainable employment” is not a measure of excess capacity.  Unemployment is much closer to an excesss capacity measure.
  • the wording treats employment as good in itself, whereas labour is an input (a cost, including to those who supply it) and a high-performing high productivity economy might well be one in which people preferred  to work less not more.  Speaking personally, as a non-participant in the labour force I feel slightly judged by the wording –  as if, by not being a good Stakhanovite, I’m not doing my bit,
  • the wording makes no attempt to integrate the two dimensions of the goal,
  • it continues to suggest that active monetary policy is primarily about medium-term price stability.  As noted earlier, we don’t need monetary policy for that goal.  Instead, medium-term price stability is more like a constraint (a really important one) on the use of monetary policy to keep the economy operating close to capacity.

I’d prefer that the goal was specified 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.  The working definition of “stability in the general level of prices over the medium-term” could be kept exactly as it now (ideally, lowered a bit once the lower bound issues are resolved).  But it is clearer, and better aligns with what we should look for from the Bank and the new MPC.

The Minister’s announcement a few months also (sensibly) proposed moving away from the current target-setting system (Governor and Minister agree before the Governor is appointed) to one where the Minister sets the objective and the MPC as a whole is responsible for implementing policy to give effect.

Currently, the PTA is an agreement between the Minister of Finance and the Governor. Looking forward, as the MPC will be collectively responsible for making monetary policy decisions, it would be inappropriate for the Governor to be the sole member of the MPC to agree the operational objectives for monetary policy. As a result, we are changing to a model where the Minister of Finance sets the operational objectives for monetary policy. These objectives will be set after nonbinding advice from the Reserve Bank and the Treasury (as the Minister’s advisor) is released publicly.

Unfortunately, the bill before Parliament today materially waters down the (very welcome) promise in the last sentence.    Under that statement from the Minister, the operational objectives would be set only after both the Reserve Bank and the Treasury had provided advice, and that advice had been made publicly available.

In the bill itself, there is no reference to advice from Treasury, and no commitment that any such advice they proferred would be made public (although no doubt eventually an OIA request would bring it to light).   The Bank is required to give advice, but that advice remains specifically that of the Governor himself.  The Governor must consult with the other MPC members (but is not even specifically required to “have regard” to their views), and the Governor’s advice is now only to be published after the Minister has published the new operational objectives.

Interestingly, the bill explicitly requires public consultation by the Bank before it submits its advice on the operational objectives (“remit”), and it is required to “have regard” to those comments.  But instead of the consultation requirement being cast broadly, the Bank is able to determine “the matters the Bank considers would assist it to prepare its advice”.   Used wisely by a good Governor it wouldn’t be a problem, but legislation is largely about protecting the system from bad or weak individuals: in the case of a bad, weak, or just overconfident Governor, that person could deliberately rule anything s/ he found awkward out of scope when inviting public submissions.  And there is no requirement that the submissions themselves should be made public –  an omission that really should be corrected.

Much of the bill is about keeping as much power with the Governor as possible, while still instituting a committee.  Sadly, it is probably a recipe for a fig-leaf committee, rather than for the sort of real and positive change that is needed.    As just one example, although future Monetary Policy Statements will have to be approved by the MPC, the bill introduces (something I’ve previously suggested) a requirement that at least once every five years a longer-term report on the formulation and implementation of monetary policy be published.   But instead of, for example, mandating the commissioning of independent assessments and evaluations, this report will be the product of the Governor alone.   The Governor will be required to consult the other  MPC members and “consider” the “comments (if any) of the MPC on the draft”, but not even a majority of the committee can alter the direction of the report if the Governor doesn’t agree.   It is bizarre and inappropriate, but seems to reflect the Minister’s preference for a fig-leaf.   Based on some of his other comments, it is not obvious that the rest of the MPC could go public even if they disagreed strongly with the Governor’s assessment.

In previous posts, I have touched on the way in which the Minister’s proposals will effectively maintain the near-complete domination of monetary policy by the Governor.  Perhaps as disconcerting is that they also increase the power of the Bank’s Board –  that group of unaccountable company directors and academics who’ve proved totally useless in ever holding successive Governors to account, and who have backed Governors without exception even as they have seriously overstepped the mark.

The new MPC will comprise the Governor, a single Deputy Governor, 1-2 internals, and 2-3 externals (plus a non-voting Treasury observer).  By law, there must be a majority of internals.  All of these people will be appointed by the Minister of Finance, at least on paper, but in reality the Minister will continue to have almost no real say over the people who wield the most powerful short-term macro policy lever.    Recall that the Minister can only appoint as Governor someone whom the Board has recommended.  Board members themselves may have been mainly appointed by a previous government.  The same procedure will now apply to the appointment of the Deputy Governor, but in practice one would expect the Governor to have a major influence on the name put forward by the Board.   The internal candidates will also be appointed by the Minister on the recommendation of the Board.  The Board will be required to consult the Governor on these appointments to the MPC, but as the appointees are most likely to be people already appointed by the Governor as (say) Chief Economist or Head of Financial Markets), the Board will have not have much effective say at all.

So the Governor –  who sets working conditions, and sets pay and conditions for the internals –  already has his majority.  But his control on the composition of the committee doesn’t stop there.  Because the Minister can only appoint the handful of externals on the recommendation of the Board, the Governor himself is a member of the Board, and the Board –  being non-experts themselves – is likely to be highly deferential to the Governor’s views on who should (and shouldn’t) be nominated.  There is no way the Board is going to recommend someone the Governor is uncomfortable with.  Good Governors will welcome challenge and diversity etc, but legislation isn’t really needed for good Governors, but for poor, weak, or insecure ones.

It is simply the wrong model.  It is, as far I can see, pretty much without precedent, leaving the elected Minister of Finance no degrees of freedom over who is appointed to conduct the most important part of short-term economic management policy.  We can, after all, hold the Minister to account.  We do nothing about the Governor, the Deputy Governor, or the MPC members all appointed, in effect, by the unelected Governor and unelected Board.   This isn’t how open and democratic societies are supposed to work.  It isn’t how central banks work in other comparable democratic countries, and it isn’t how we handle appointments to other major crown entities.

I’ve argued previously that a much superior model would be:

  • all members, including Governor and Deputy, appointed directly by the Minister of Finance,
  • a requirement for a clear majority of external members, and
  • non-binding confirmation hearings by FEC on all (external) appointees before they take office (mirroring the practice now adopted in the UK for the Bank of England MPC).

The amendment bill Parliament will be considering today does not really deal with the communications procedures etc that are envisaged –  most of that is delegated to a charter to be determined later.  The Minister has, however, already indicated that his bias is towards a system where decisions are reached by consensus if possible, and that although minutes will have to published, there would be no identification of individual dissenting votes or any ability for MPC members to openly express their own views on monetary policy and economic issues.   That will suit the Governor, but won’t advance the cause of good policymaking or of an open and accountable central bank.    The charters are supposed to be agreed between the Minister and the MPC (recall that the Governor will almost always have a built-in majority) but the bill provides that the first such charter –  from which it will be hard to deviate much for a long time –  will be agreed not with the first MPC but just between the Governor and the Minister.   No doubt, the Governor will ensure his personal and institutional interests are served.  Will the Minister care enough to look to the interests of the wider process and of the public?  (And will the Governor still be able to talk openly about climate change policy, infrastructure, capital gains taxes etc, and if he, then what about the rest of the committee, for whom monetary policy won’t be a fulltime job.)

As I said, this bill further increases the power of the Board.    Another example –  extraordinarily so given the Board’s own shocking record –  is that the Board will be required to approve a code of conduct for MPC members.   But instead of discussing those arrangements and provisions with the first MPC members, the bill provides for the Governor and the Board to cook up the code of conduct themselves, no doubt reflecting the interests and preferences of the Governor.

As for Board’s capability and credibility in this area, well where do I start?  In just the last couple of years:

  • they’ve backed the Governor in attacking a member of the public who brought to light a leak in an OCR annoucement,
  • they’ve backed the Governor is his attack on, and attempt to muzzle, BNZ’s chief economist,
  • they’ve demonstrated a flagrant disregard for the provisions of the Public Records Act (maintaining no minutes of any meetings involving the appointment of the new Governor),
  • they confirmed that they had provided no written advice to the Governor in recent years at all,
  • they have shown no sign of interest in resolving serious misconduct issues in a superannuation scheme they have considerable legal responsibility for.
  • their own code of conduct, when finally revealed, proved to have no conflict of interest provisions at all,
  • they seem to have no interest in acting to keep the current Governor on reservation, and
  • just this week, their chair has attempted to assert that Chatham House rules trump the Official Information Act.

A supine, lawless group.  Just the sort of people you would look to for leadership in this area…..     But, no doubt, just the sort of people who can be relied on to do the Governor’s bidding and avoid any openness, challenge, or serious scrutiny.  In fact, who can be relied on the ensure that the new MPC is little more than a figleaf.   One has to wonder who will be willing to accept appointment, for anything other than the status, the pay or perhaps just academic curiousity.  Those aren’t the sort of motives we need in a revamped Reserve Bank.

All in all, this legislation falls far short of what could, and should, have been.   The Governor should be a CEO servicing and supporting (and chairing) an open and accountable, ministerially appointed committee.  Instead, his empire –  his dominance –  will be intact.   It cements in the victory for the Bank establishment, and for the Governor personally.  I haven’t yet written about Stage 2 of the review now underway, but the possibility of good outcomes from that process took a big step back when the Minister agreed that the review would be jointly done by the Bank and Treasury (which side is going to be more motivated to fight its corner?) reinforced when it emerged that the review process is being led by a (seconded) member of the Reserve Bank’s own senior management team, who will have his own future, working for the Governor, to look to.