Towards a more open central bank

Earlier in the week I wrote a post making the case for reform of the Reserve Bank to be done in such in a way that encourages a much more open central bank, at least in its monetary policy dimensions (there are similar, but different, issues around the other areas of the Bank’s responsibilities).     That post was prompted by the public efforts of the “acting Governor” and his deputy (and acknowledged candidate to be the new Governor) to push back against (a) external members on a new statutory Monetary Policy Committee, and particularly (b) to resist any suggestion of any greater transparency around monetary policy.   As I illustrated in that post, what these officials dislike are systems that work well, and have become established, in places as diverse as the United Kingdom, Sweden, and the United States.  There is no obvious reason why such an approach could not work well in New Zealand.  And it is not as if the Reserve Bank’s reputation now stands so high that no sane person can envisage any possible room for improvement.

I gather that Spencer and Bascand have since given other interviews restating again their opposition to reforms along these lines.  Whatever their views, it is astonishing that they are carrying on this campaign in public –  even as Bascand has been privately making his case to be the next Governor.  They are bureaucrats, who are paid to operate under the laws, and governance arrangements, that Parliament – acting on behalf of the people –  establishes.  Good statutory provisions governing powerful public agencies involve striking a balance between, on the one hand, drawing on technical expertise, and on the other hand, protecting the interests of citizens against over-mighty bureaucrats advancing their personal interests and/or the interests of their bureau.    Openness and transparency are among those protections.  It is perhaps telling that Bank officials are keen on openness when it allows them to advance their views on this issue –  to protect their patch –  but not when it might prove awkward for them.   Graeme Wheeler was much the same  –  last year willing to go public to tell us that for one controversial OCR decision every single one of his advisers had supported him, but then willing to fight all the way to the Ombudsman to prevent citizens seeing comparable numbers for other decisions (even ones well in the past).  The only principle that seems to guide them on such matters is patch protection and self-interest, precisely the things we need protection against (and the sorts of things that motivated the Official Information Act 35 years ago).

In the purpose provisions of the Official Information Act, the very first item is this

to increase progressively the availability of official information to the people of New Zealand in order—

  • to enable their more effective participation in the making and administration of laws and policies; and
  • to promote the accountability of Ministers of the Crown and officials,—

and thereby to enhance respect for the law and to promote the good government of New Zealand

It is a mindset that has never taken hold at the Reserve Bank.    And thus it was encouraging that in the Speech from the Throne the other day there was an explicit commitment to “improving transparency” around monetary policy.

But after my post the other day, someone got in touch to point out that I’d left out one argument for a more open (monetary policy) central bank.  This correspondent noted that they would have

….added another argument for the value of individual responsibility of committee members: Central banks should stop pretending that the future is knowable, and the economy well understood. Monolithic representation of THE Bank view perpetuates that dangerous myth.

I agree entirely.  To have left it out the other day was an oversight, but it was also something implicit in many of the other arguments and international experiences.

Getting monetary policy roughly right –  the best than anyone can hope for –  is a process of discovery, iteration, revision and so on.  It isn’t a case of one wise person, or even a handful of wise bureaucrats, consulting the secret oracle, and revealing truth to the peasants.   Members of a monetary policy committee –  or the Governor under current NZ law –  get to make the final decision on the OCR, but they know no more about how the economy works, or what might happen next, than any number of other observers.  Indeed, of the four members of Wheeler’s advisory Governing Committe, only one could be considered pretty much fulltime focused on monetary policy (the chief economist).  Of course, they have more analytical resources at their command –  but, in fact, those are our resources, paid for by taxpayers.

When it suits them, the Bank will –  correctly –  emphasise just how much uncertainty there is about the appropriate monetary policy, and how the economy and inflation might unfold in future.  But, if so, what do they have to be afraid of from a much greater degree of openness?

I went back and listened again to the relevant bits of Thursday’s press conference.  Governor-aspirant Geoff Bascand was quite explicit that he thought people needed to focus on the issues that “the Bank” had set out in its Monetary Policy Statement, on “the risks ‘the Bank’ was considering”, on “the substance”.  Bascand didn’t want people focusing on the other issues, or divergences of views, and so on.

It is the same old mindset: we know “the truth”, we know which issues are important and which aren’t, we know how best to balance risks, and so on. And “we” can’t possibly risk letting people know that there might, at times, be genuine differences of view among able people at the Reserve Bank.   But what evidence do they have for such claims?  Either of the degree of knowledge they (implicitly) claim for themselves. or for the level of risk they claim explicitly to worry about.    Instead, life is just easier for bureaucrats if we maintain the secrecy, and continue to channel a monolithic view –  monolithic this time, monolithic next time, monolithic the time after, even though each of those monolithic views may be quite different from each other.

It would bore readers to run through the evidence for how often the Governor’s monolithic view has been wrong (or central banks in other countries have been wrong).  Sometimes one could count him culpable. At other times, things just turned different than most people –  inside or outside the Bank –  reasonably thought likely.  That is the nature of the beast: things are highly uncertain and nothing is gained, no one’s interests (probably not even those of really capable bureaucrats) are advanced by keeping on pretending otherwise.  The evidence to the contrary is there almost every time any central bank sits down and deliberates on monetary policy.  Mostly, it seems as of Spencer, Bascand, and McDermott have settled in a comfortable rut.  It may suit them, but that isn’t a good argument in institutional design.

I noted the other day the Supreme Court offers a good counter-example.   Final appellate decisions are, in some ways, quite like OCR decisions.  They aren’t necessarily “the truth”, but they are final.   Smart lawyers make sophisticated arguments on either side of any particular case.  Smart judges often enough disagree among themselves.  Some decisions end up being made by a 5:0 vote, but many are 3:2 decisions, and the Chief Justice can easily be in a minority.    Court hearings are, typically, open, and decisions – in the affirmative, and dissenting –  are typically published.    Only an idealist would pretend that the decision is “truth” –  the only possible, or sensible, way of reading the facts and relevant statutes.  But that particular panel of judges –  chosen for their character and expertise –  gets to make the final decision.

It isn’t clear why monetary policy should be so different.  It is even more provisional since, although each OCR decision is final, the panel is back every couple of months looking at an only slightly different set of facts, but sometimes reading them in quite different ways.  I’m not suggesting –  at the ludicrous extreme –  broadcasting meetings of a Monetary Policy Committee, but I can see no possible harm – to the public, or to a well-managed Reserve Bank – from shifting to a culture of much more radical openness, suited to the specifics of monetary policy.   Why shouldn’t the relevant background papers be published, even with a bit of a lag?  Doing so would not only gives stakeholders more a sense of the quality of the staff analysis, it would allow outsiders to point to things staff might (being human) have missed.    Why shouldn’t dissenting opinions, carefully crafted, be included in the minutes (much as the appellate judges do)?  And why shouldn’t members of the MPC –  each independent statutory appointees, and accountable as such –  be giving thoughtful speeches, or interviews, outlining how they see the issues around monetary policy, in ways that invite input from outsiders.  Capable people –  the only sort who should hold these roles –  need have nothing to fear from the contest of ideas.  From such exchanges, from such scrutiny, usually better decisions –  still imperfect –  will emerge.  And the public will have a better sense of the limits of what they can expect from any agency in an area so (inevitably) riddled with uncertainty.

Openness can be messy.  There will be mis-steps at times.  But that is nature of a free and open society.    Choreographed uniformity of view should be left to Xi Jinping.  I noticed a day or so ago that Robert Kaplan, head of Dallas Fed, was on the wires observing

“History has shown that normally when we have a substantial overshoot the Fed ultimately needs to take actions to play catch-up,” Kaplan said in an interview with the Financial Times.

Kaplan said he was actively considering “appropriate next steps” when asked if he was willing to consider a rate rise at the upcoming Fed meeting, FT reported.

I’m sure there are plenty of people around the Fed who will disagree with Kaplan’s particular perspective.  But the question for old-school bureaucrats like Spencer and Bascand is what possible harm, to the conduct of monetary policy or the interests of the American people, is done by such openness?  I can’t see any.  I hope the Minister of Finance –  helped by the forthcoming Independent Expert Advisory Panel –  will draw the same sort of conclusion, and ensure that the new legislation is crafted, and key appointments are made, accordingly.

An open central bank is the way to go

The new government is setting up a process to review the Reserve Bank Act, including –  but not limited to –  giving effect to Labour’s campaign promises to introduce some sort of employment objective to the Reserve Bank Act and to create a statutory committtee, including external appointees, to take OCR decisions.

It is a once-in-a-generation opportunity to reshape the central bank, a key policymaking (and implementing) institution in our economy and financial system.   As the Minister has pointed out, the current Act was written almost 30 years ago.  Lots of things about monetary policy, and the wider role of the Bank, turned out differently that was expected, or perhaps hoped for, thirty years ago.   Little about the New Zealand system has been followed by other countries who’ve reformed their central banks in the years since.

Of course, the bureaucrats at the Reserve Bank (“the old guard” as Bernard Hickey described them last week) aren’t keen on change at all.  Bureaucrats rarely are.  For years they have been successful in keeping secret their preferences –  Graeme Wheeler refused to release any of the work they’d done on reform issues and options a few years ago –  but last week they went public.    Unlawfully appointed “acting Governor” Grant Spencer, and his deputy –  and declared candidate to be the next Governor –  Geoff Bascand, used the platform of the Monetary Policy Statement press conference to outline their opposition to change –  or at least to any change that might diminish the power of Reserve Bank management (ie them, or people like them).

Spencer loftily declared that, of course, they weren’t opposed to a committee.  In fact, they supported one. But, in his words, they already had a committee, they thought it worked well (perhaps unsurprisingly since they are members of that  – purely advisory –  committee), and would be happy to see it established in law.   But, asked about outsiders on the committee –  something the government had promised, both in the Labour Party campaign, and in the Speech from the Throne the previous day-  Spencer was very wary.  How, he wondered, could we sure of finding enough suitable people without insuperable conflicts of interest? (How, I wonder, do we manage with almost every other agency of the state?)  Worse still was the idea that the members of any new Monetary Policy Committee might individually be held to account, and their views on the OCR be known to the public.   Why, Spencer declared, it could turn into a “circus”, with much too much focus on monetary policy –  as, he asserted, it had in some other countries.  Bascand worried that people might focus on the views of members of the committee, not on the issues “the Bank” wanted to focus on.

It was like some sort of blast from the past. Many bureaucrats, for example, hated the idea of the Official Information Act too.  Open government is an anathema to most.  But of considerable benefit to citizens.    Not one of the three “old guard” sitting at the top table at that Reserve Bank press conference has ever shown any serious or sustained interest in open government, especially as it applies to the Reserve Bank.  They are, in practice, devotees, to the “cult of the expert”, in which the public is told only what the “wise experts” determine they should know.   Thus, our Reserve Bank will happily tell you what they think the OCR will be in 2020 –  by when the decisionmaker will have changed, and the PTA and Act too –  but they fight tooth and nail, too often with the support of the Ombudsman, to keep secret their current deliberations, current analysis, or the advice the “acting Governor” receives on current monetary policy.   It is tidy, to be sure.  Open government isn’t –  in fact, it is often a bit messy.  But it benefits citizens, and over time actually makes for better government institutions and policies as well.

As I noted the other day, despite claims that an open central bank could turn into a “circus”, neither Spencer nor Bascand has offered any evidence in support of their claim.  There are aspects of how central banks work in other countries that, at times, career central bankers don’t like. But the interests of career central bankers and bureaucrats and those of the public don’t necessarily overlap much, if at all.

Each country has its own system, with its own idiosyncracies.  Many of those provisions aren’t –  and probably shouldn’t be – written into law.  Institutional cultures need to evolve.

But in Canada, they manage to run an open programme of research and dialogue as part of each five-yearly review of the inflation target.  In Sweden, members of the monetary policy decisionmaking board can, and do, articulate their views, not just in speeches around the decisions, but in substantive records in the minutes.  At the Bank of England, the Governor has been willing to be out-voted (and for that to be in the published minutes), even to vote differently than his own senior executives (some of whom are members of the Monetary Policy Committee).  The Bank of England runs a staff blog that, at least at its foundation, was sold as an opportunity for staff to challenge established orthodoxies (it is a good blog, although it never quite delivered on that –  unrealistic promise).  In the United States, senior researchers have been free to publish papers and books that disagree quite strongly with the way the Fed has run monetary policy.   The Atlanta and New York Feds have competing, and published, nowcasting models of current GDP growth.  John Williams –  head of the San Francisco Fed –  was not long ago out in public suggesting that the Fed shift away from inflation targeting, towards something more levels-focused.  As I noted then

I’m not persuaded by Williams’ case, but what struck me is how open the system is when such a senior figure can openly make such a case.  The markets didn’t melt down. The political system didn’t grind to a halt.  Rather an able senior official made his case, and people individually assessed the argument on its merits.

The FOMC doesn’t publish minutes as detailed as those of the Riksbank, but voting members can record their dissent from a majority decision, and they (and other regional Fed heads) can and do use speeches to articulate their own thinking about the economy and monetary policy. It is rarely, if ever, as explicit as “I’ll be voting for a 25 point increase at the next meeting”,  but outlining how that particular person thinks about the economy, the risks, and perhaps the challenges/opportunities the Fed faces.

My impression –  and I’ve kept an eye on these things for a long time –  is that the Swedish, British and US system all work well.    I’ve heard current and former Governors of some of these places moan about the systems, and individuals –  Stefan Ingves of the Riksbank, who was famously wrong in his disagreement with Lars Svensson, was here only about three years ago.   But since the whole point of dispersed, and open systems, is to limit the power of a single Governor, that unease should more likely be seen as a feature than as a bug.  Same goes for the claims of Spencer and Bascand here.

There have been concerns –  again from internal career people –  that externals on Monetary Policy Committees may use the visibility of a public platform to pursue their next career opportunity.    This was strongly asserted of one particular member of the Bank of England MPC in its early days –  a member who made life difficult for the Bank of England management.

It is, probably, a bit of an issue.  But it is no less so for management people.  I”m old-fashioned enough to think that Governors of the Reserve Bank (like Prime Ministers)should retire, and settle for gardening, charity work or whatever.  But it isn’t the way public life now runs.  Don Brash was on the board of our largest bank just a few years after ceasing being Governor, Ben Bernanke makes large amounts of money from his new roles in the financial sector,  Glenn Stevens has just signed-up as adviser to a macro hedge fund, and if I recall rightly when Graeme Wheeler announced he wasn’t seeking a second term as Governor he indicated that he had always planned to do only five years and then to step back into Board roles.    There is empirical evidence that the prospect of the “next job” has, at the margin, influenced monetary policy decisions that central bankers have made, and real concern that it can affect regulatory policy decisions.     These aren’t just issues for central banks –  and they certainly aren’t just issues for part-time external members of policy boards.

And the other issue that often gets raised is the potential for “confusion” or heightened market volatility.    The public, and markets, just won’t (it is suggested) be able to cope with differences of view in plain sight.  Strangely enough, they seem to in other countries.  There is no evidence I’m aware of suggesting that market conditions are less volatile here because we have a secretive monolithic central bank, but if such evidence exists perhaps the Bank could publish it, or point us to it.  If anything, there is a possible counter-argument (which I wouldn’t want to make much of) that if it is known that a variety of voters on a monetary policy committee have different views, and different (explicit or implicit) models, and if those views are being updated in public periodicially, market adjustment might be easier and less disupted than being restricted to a six-weekly decree from the mountain-top.  As I say, I wouldn’t want to make much of that argument –  open government is good in its own right, and seems to work (in central banks) in various other democratic countries –  but it is just to note that the argument doesn’t run all one way, even on this narrow point.

The “acting Governor” attempted to back his opposition to any sort of open acknowledgement of differences of view –  on a subject where, the Bank rightly and regularly reminds us, there is huge uncertainty –  by comparison with the Cabinet.

Cabinet collective responsibility has, historically, been an important part of our system of government.  In ye olden days – ie before MMP –  all our government ministers were, without exception, from a single political party.  They were elected on a common platform and, even if there were intense rivalries among them, they expected to seek re-election on a common platform.  These days, of course, we have often have ministers outside Cabinet who are representing parties not considered part of the government, and those ministers –  not having a common programme –  are not bound by the conventions (which is all they are) of Cabinet collective responsibility.

But even if Cabinet collective responsibility is one legitimate model, it is hardly the only one.  In Parliament, for example, laws are debated and passed, and who voted for the law and who voted against it is no secret.  MPs lobby, and are lobbied, give speeches, go on disagreeing after the final vote, but the law is the law.  The authority and robustness of the law is not diminished by robust open debate.  If anything, it is the alternative that would worry us –  the Chinese People’s Congress anyone?  Our local authorities mostly debate things openly –  majorities win, minorities lose, and life goes on.   And talking of the law, no one seems to think it a problem, that a bench of judges on the Supreme Court will often divide 3:2, and the Chief Justice might well be on the losing side.  Dissenting views can be, and typically are, properly documented and made available.

And it is worth reminding ourselves the nature of the OCR decisions. They aren’t once-for-all decisions, but ones that are revisted every couple of months, precisely because new data come available, and what to make of that data remains very uncertain.   There are, often enough, no self-evidently “correct” answers.   It is the sort of climate in which good decisionmaking is likely to be advanced by as open an approach as possible, and public confidence in the quality of the decisionmaking is likely to be advanced by the ability of citizens to assess the arguments (and the quality of the argumentation) of those given statutory power to make these decisions.  Truth doesn’t simply flow from the Reserve Bank to the public.

And the open approach seems to work in a variety of other countries.  It isn’t the only approach that can work.  But it does work, without obvious problems, in Sweden, in the UK, in the United States, three otherwise quite different countries.  There is no reason why it shouldn’t work here.

How might a reformed Reserve Bank work in respect of monetary policy?

  • The (monetary) policy targets should be set by the Minister of Finance in each year’s Budget (essentially the UK system),
  • all members of the statutory Monetary Policy Committee should be appointed directly by the Minister of Finance (the Australian system),
  • all members should be subject to confirmation hearings at Parliament’s Finance and Expenditure Committee.   Members would not be subject to parliamentary ratification, but the committee could publish any serious concerns it hard (essentially the UK system),
  • probably a five member committee (Governor, a Deputy Governor, and three non-executive members), with all members having overlapping five year terms (the Swedish system has a majority of external members),
  • a statutory requirement to publish the minutes of MPC meetings, including the numerical vote on any OCR decision, within two weeks of the meeting date (publication of minutes, on a timely basis, is now pretty standard),
  • publication of all the background documents for each monetary policy decision within two months of the relevant policy annoucement,
  • no statutory prohibitions on the ability of individual members to make speeches or give interviews on monetary policy matters (pretty standard these days).

On that final bullet point, I don’t think this is a matter for statute, and it is something the new Monetary Policy Committee should work out for themselves over time.  Institutional cultures need to be able to be able to evolve.  Having said that, I would strongly favour a more open approach –  of the sort that works well in several countries abroad – and would encourage the government to appoint people (as Governor and as committee members) who are committed to building an open institution, and yet who can engage effectively, and with mutual respect, with each other.

I’d also establish a statutory provision allowing the Minister of Finance to appoint an external reviewer perhaps every five years, to encourage periodic  independent external review of how the system is working, and of how the Bank has been conducting monetary policy.

Many of the issues are about culture rather than statute, but I would hope that the new Governor will look carefully at encouraging staff to engage more openly on policy and analytical issues.   Blogs have been adopted by several overseas central banks, but the precise vehicle is less the issue than the cultural change that should be encouraged.

None of this sketch outline should be considered as the details of what I might recommend to the government’s review when it gets underway.  There are lots of fine-grained details to consider in reshaping the statutory provisions around monetary policy, and quite a few interdependencies among them (let alone interdependencies with other functions, and issues around what –  precisely –  an MPC would and wouldn’t be responsible for).  If they invite proper submissions, I will make one –  and publish it –  but my point today has really just been twofold:

  • open systems work well in various other countries –  including countries with central banks that are at least as well-regarded (generally better in my view) than our Reserve Bank, and
  • to sketch out a set of arrangements that look as though they could be workable for New Zealand and which could, with goodwill and the right people appointed, deliver us a more open, more effective, and better-regarded central bank for New Zealand.

And to suggest that, no matter how genuinely Spencer and Bascand might believe their points in opposition to serious reform, the views of the Reserve Bank “old guard” are best seen as (predictably) serving the interests of Bank management, rather than those of the public, and shouldn’t be taken very seriously unless they can advance much more evidence (than the zero so far) of the sort of potential problems the sorts of open systems that work well in other countries might credibly pose.

It isn’t clear how committed the government is to serious reform. But they have an open opportunity to put in place something much better and different, more suited for this generation.  Doing so will require good laws and good people.  I hope they don’t let the opportunities –  on either front –  slip by.

 

The Reserve Bank second XI takes the field

The second XI at the Reserve Bank fronted up to present today’s Monetary Policy Statement.    There was the unlawfully appointed “acting Governor” Grant Spencer –  who is now signing himself as “Governor”, not even as acting Governor –  the chief economist, John McDermott, and the new head of financial stability (and openly acknowledged applicant for Governor) Geoff Bascand.    At best, they are holding the fort until the new Governor is appointed, and a new Policy Targets Agreement put in place, but despite that Spencer still felt confident enough to assert that “monetary policy will remain accommodative for a considerable period”.     How would he know?  He won’t be there.

One could feel a little sorry for the Bank.  After all, not only is the second XI holding the fort, but a new government took office only a week or so ago.    Between Labour’s manifesto commitments and the agreements with New Zealand First and the Greens, there are a lot of new policy measures coming.  But there is not a lot of detail on most of them.    The Bank’s typical approach in the past has been not to incorporate things into the economic projections until they become law (at, in the case of fiscal policy, in a Budget).   They’ve departed from that approach on this occasion, and have incorporated estimates of the macro effects of four new policies:

  • fiscal policy,
  • minimum wage policy,
  • Kiwibuild, and
  • changes to visa requirements affecting students and work visas.

I suspect they’d have been better to have waited.  On fiscal policy, for example, there are no publically available numbers yet –  just last week the Prime Minister told us to wait for the HYEFU.    On immigration, there has been nothing from the new government on the timing of any changes.  And on Kiwibuild, there is no sign of any analysis behind the assumption the Bank has made that around half of Kiwibuild activity will displace private sector building that would otherwise have taken place.  And so on.

And then there are the numerous other policy promises the Bank hasn’t accounted for.  In the Speech from the Throne yesterday there was a clear commitment to “remove the Auckland urban growth boundary and free up density controls” in this term of government.  If so, surely that would be expected to affect house prices and perhaps building activity?   Binding carbon budgets are also likely to have macro effects.

I’m not suggesting the Bank can produce good estimates for any of these effects.  Rather, they’d have been better to have stayed on the sidelines for a bit longer, since they were under no pressure at all to change the OCR today, rather than incorporate rough and ready estimates of a handful of forthcoming changes, with little sign that they have really stood back and thought about how the economy is unfolding.

And the conclusions they’ve come to do seem rather questionable.  The “acting Governor” kicked off his press conference talking of the “very positive” economic outlook.  I’m not sure how many other people will agree with him. As the Bank themselves note, they’ve been surprised on the downside by recent GDP outcomes, and housing market activity has been fading.  Even dairy prices have been edging back down, and oil prices have been rising.  (And, of course, there has been no productivity growth for years.)

The Bank forecasts an acceleration of economic growth –  even as population growth slows –  on the back of additional fiscal stimulus and additional building activity under the Kiwibuild programme.    Like other commentators, I’m rather sceptical that we will see anything quite that strong.  But even on their own numbers, productivity growth over the next few years is now projected to be weaker than the Bank was projecting in August.       And if Kiwibuild really is going to add so much to housing supply, in conjunction with slower population growth than the Bank was expecting, how plausible is it real house prices will simply be flat as far the eye can see (or the forecasts go)?  Not very, I’d have thought.

In the end, the numbers don’t matter very much.  Spencer will be gone at the end of March, and we’ll have a new Governor and a new PTA.  A new Governor will make his or her own assessment, and own OCR decisions.  But part of what that person will need to do is take a look at lifting the quality of the Bank’s economic analysis.

For all the talk of initiatives promised by the new government, the Monetary Policy Statement itself was striking for containing not a word –  not one –  mentioning that the monetary policy regime itself is under review.  Of course the “acting Governor” can’t pre-empt changes the detail of which aren’t known, but the Act does require the Bank to discuss in MPSs how monetary policy might be conducted over the following five years: a horizon over which we’ll have a different PTA, a different Governor, an amended statutory mandate, and a statutory committee to make decisions.

My main interest was in the contents of the press conference, where journalists raised both the issue of the proposed new mandate and the proposed changes to the statutory decisionmaking model.    In both cases, I suspect the second XI said too much.

Asked about the proposed mandate changes, Spencer began noting that he couldn’t say too much as the review was just getting started.  He then went on to assert that “moving to a dual mandate was unlikely to have a major impact on how policy is run”, explaining that in many ways flexible inflation targeting is akin to a “dual mandate” (something that, in principle, I agree with).     But then, somewhat surprisingly, he claimed that the proposed change could lead the Bank to become more flexible, potentially allowing greater volatility in inflation to promote greater stability in employment.  I guess it depends on the details of the changes, which none of us yet knows, but it was the first I’d heard of anyone calling for more volatility in inflation.  Over the last decade, those who think the Bank hasn’t put sufficient weight on the labour market indicators (like me) would have been quite happy to have seen core inflation at the target midpoint on average.  The previous Governor committed to that, but didn’t deliver.

On which note, it was a little surprising to hear the Chief Economist talk about how the Bank had improved its forecasts, and got its inflation forecasts right over the last couple of years.  That would then explain why core inflation has remained persistently below the target midpoint???  And has not got even a jot closer in the last couple of years?

Spencer noted that at present the Bank regarded the labour market as ‘pretty balanced’, such that a dual mandate wouldn’t make much difference right now.   But it turns out that they really don’t know.

They were asked a question about the government’s goal of getting the unemployment rate below 4 per cent, and –  fairly enough –  drew a distinction between structural policies that might lower the NAIRU and anything monetary policy could do.  When pushed, they argued that on current structural policies, an unemployment rate lower than 4 per cent would be inflationary, and suggested that estimates of the NAIRU range from 4 to 5 per cent at present.

But then all three of the second XI went on.  Spencer noted that the estimates are ‘very uncertain” and that in anticipation of a “dual mandate” the Bank was now doing some work to come up with some estimates of the NAIRU, suggesting that they haven’t had a precise estimate until now [although there were always assumptions embedded in the model].    Then the chief economist –  who at almost every press conference tries to discourage the use  of a NAIRU concept –  chipped in claiming that any NAIRU was “very very variable” and “changes all the time”, without offering a shred of evidence for that proposition.

And then the head of financial stability chipped in, opining that estimates of NAIRUs around the world have been declining (not apparently seeing any connection between this thought and (a) the NZ experience, and (b) his colleague’s observation a few moments earlier that the numbers were pretty meaningless anyway.

Out of curiousity I had a look at the OECD’s published NAIRU estimates.  This is the NAIRU for the median OECD monetary areas (ie countries with their own monetary policy plus the euro-area as a whole).

nairu oecd

The estimate for 2017 is 5.3 per cent.  That for 2007 was 5.5 per cent.     There just isn’t much short-run variability in the structural estimates of the long-run sustainable unemployment rate. That is true for other advanced countries.  It is almost certainly true for New Zealand.    It reflects poorly on the Reserve Bank how little they’ve done in this area, and it one reason why a change in the wording of the statutory mandate is appropriate.  The unemployment rate is a major measure of excess capacity, pretty closely studied by most central banks but not, until now it appears, by our own.

(Of course, had they wanted to be a little controversial, they could have noted that proposed structural policy changes –  notably the increased minimum wages they explicitly allowed for –  will tend to raise (not lower) the NAIRU to some extent.)

If they were at sea on the unemployment rate issue, what really staggered me was the way Spencer (and Bascand) used the press conference to campaign for minimal changes to the statutory governance and decisionmaking model for monetary policy.      They didn’t need to say more than “decisionmaking structures are ultimately a matter for Parliament, and we will be providing some technical input and advice to the Treasury-led process the Minister of FInance announced earlier in the week”.

But instead, they took the opportunity to campaign for as little change as possible.  Spencer noted that they agreed the Act should be changed to provide for a committee, but noted that they already had a committee, they thought it worked well, and they would like to reflect that in the Act.   Others might challenge whether the advisory committee, or the Governor, has done such a good job in the last five years (or today) but set that to one side for the moment.

They loftily conceded that there were possible advantages to having externals on a committee –  the potential for greater diversity of view. But they were concerned that in a small country it could be very difficult to find outsiders with unconflicted expertise to make the system work.  There was nothing to back this –  no explanation, for example, as to how places like Norway and Sweden manage, or how we manage to fill the numerous other government boards in New Zealand.

But what they really hate –  and I knew this, but was still surprised to hear them proclaim it so openly, just as a proper review is getting underway –  is the idea that any differences of view might be known to the public.   They could, we were told, tolerate a system of ‘collective responsibility’ –  in which all debates are in-house and then everyone presents a monolithic front externally –  but were strongly opposed to any sort “individualistic committee” in which individual views might become known.    These systems –  of the sort prevailing in the UK, the United States, Sweden, and the euro-area –  have, they claimed, the potential to become a “circus” with too much media focus on monetary policy, and a concern about “heightened volaility” in financial markets.   Spencer went so far as to suggest that an individualistic approach could undermine the reputation and credibility of the institution.

A slightly flippant observer might suggest that the second XI and their former boss have done that all by themselves –  between the actual conduct of policy, and attempts (in which they all participated) to silence one of their chief critics.  A more serious observer might ask for some evidence from the international experience, to suggest that the more individualistic approach has damaged the standing of the Fed, the BOE, or the Riksbank.  Are these less well-regarded organisations than the Reserve Bank of New Zealand?    I’d have thought it would be hard to find such evidence.

Bascand –  one of the declared candidates for Governor –  then chipped in to note that what management was concerned about was to ensure that the focus of discussion was on the issues “the Bank” had identified, not on individuals or their particular views. Loftily –  earnestly no doubt – he declared that they wanted the focus to be on substance.  No doubt, as defined by management.   It reinforces the point I’ve made often that Bascand is the candidate for the status quo.  Bureaucrats setting out to protect their bureau.  Predictable behaviour – even if usually more subtle than this –  and what the public need protecting from.

There are successful central banks that adopt the collegial approach –  the RBA is one, albeit one with a rather old-fashioned committee decisionmaking model –  but there is nothing to suggest, in the international experience, that that model produces better outcomes, or a more credible central bank, than the individualistic approach.  Indeed, many observers would regard Lars Svensson’s open disagreement with his colleagues on the Riksbank decisionmaking committee as a useful part of the process that finally led the rest of the committee, including the Governor, to abandon their previous excessively hawkish approach a few years ago.

The second XI’s approach is that of “the priesthood of the temple” –  we will tell you, the great unwashed, only what it suits us to tell you, in the form we want to present it.  It is simply out of step with notions of open government, or with a serious recognition that monetary policy is an area of great uncertainty and understanding is most likely to be advanced by the open challenge and contest of ideas.

Fortunately, the new government shows signs of seeing things differently.   There is a minister for open government (admittedly, lowly ranked), a commitment to improving transparency under the Official Information Act.  And in the Speech from the Throne yesterday there was an explicit commitment –  not referenced by the Second XI, still trying to relitigate – that

“The Bank’s decision-making processes will be changed so that a committee, including external appointees, will be responsible for setting the Official Cash Rate, improving transparency.”

Note the use of “will”.   The Bank management’s preference for a “collective model” would do nothing at all to improve transparency.

It is all a reminder of how uncertain things still are, and how important the membership of the Independent Expert Advisory Panel the Minister of Finance has pledged to appoint as part of review of the Act might be (including whether the panel is really “expert” or –  as rumour suggests – a politician might chair it).   And also how important it is that Bank management do not have a leading say in the advice that goes to the Minister.  Management is paid to implement Parliament’s choices, not to devise models that cement in the dominance (and secrecy) of management.

It is also a reminder of just how important the appointment of the new Governor is, and why it remains hard to be confident about just how committed the government is to serious change when they’ve left that appointment in the hands of the Reserve Bank Board –  all appointed by the previous government, all on record endorsing the way things have gone for the last five years, and with a strong track record of serving the interests of management rather than those of (a) the public and (b) good public policy.

The Robertson reviews of the RB Act

When you’ve favoured a reform for the best part of 20 years, and made the case for it –  inside the bureaucracy and out –  for several years, then, even though it was a reform whose time was coming eventually, there is something deeply satisfying about hearing the Minister of Finance confirm that legislative change will happen.    That was my situation yesterday when Grant Robertson released the terms of reference for the review of the Reserve Bank Act, including specific steps that will before long end the single decisionmaker approach to managing monetary policy.   Various Opposition parties had called for change (the Greens for the longest), market economists had favoured change,  The Treasury had tried to interest the previous government in change five or six years ago, before Graeme Wheeler was appointed.  But now the Minister of Finance has confirmed the government’s intention to introduce legislation next year.   The amended legislation won’t be in place before the new Governor takes office, but presumably the policy will be clear enough by then that the new Governor will know what to expect, and what is expected of him or her.  Reform was overdue, but at least it now looks as though it will happen.

There were several aspects to yesterday’s announcement from the Minister of Finance:

  • the new “Policy Targets Agreement”,
  • the two stage process for an overhaul of the Reserve Bank Act, and
  • inaction on the appointment of the new Governor.

In what looks like not much more than a photo opportunity, Grant Robertson got Grant Spencer, current “acting Governor” of the Reserve Bank over to his office and together they signed a “Policy Targets Agreement” that was, in substance, identical to the one Steven Joyce and Grant Spencer had signed in June.

There was no legal need for a new Policy Targets Agreement (even if either of these two documents had legal force, which they don’t), and no incoming Minister of Finance has ever before requested a new PTA (the Minister has to ask, and can’t insist) that is exactly the same as the unexpired one that was already in place.   When National came to power in 2008, they did ask for a new PTA.   The core of the document –  the obligations on the Governor –  weren’t altered, but they did replace clause 1(b), which describes the government’s economic policy and how the pursuit of price stability fits in.  Under Labour that had read

The objective of the Government’s economic policy is to promote sustainable and balanced economic development in order to create full employment, higher real incomes and a more equitable distribution of incomes. Price stability plays an important part in supporting the achievement of wider economic and social objectives.

National replaced that with

The Government’s economic objective is to promote a growing, open and competitive economy as the best means of delivering permanently higher incomes and living standards for New Zealanders. Price stability plays an important part in supporting this objective.

If the new Minister of Finance really thought a new PTA was required to mark his accession to office, surely he could have at least replaced the National government’s policy description with one of his own –  even simply going back to Michael Cullen’s formulation, which actually mentioned full employment.

Apart from the photo op, I’m not sure what yesterday’s re-signing was supposed to achieve.  The Minister presented it as providing certainty to markets, but it does nothing of the sort: we are in the same position now we were a couple of days ago, Robertson had already told us he wouldn’t make substantive changes until the new Governor was appointed and we still have no idea who that person will be, or what the precise mandate for monetary policy only a few months hence will look like.  Nor, presumably, does the Reserve Bank.

And by signing the document, Robertson seems to have bought into Steven Joyce’s “pretty legal” (but almost certainly nothing of the sort) approach to the appointment of an “acting Governor”.    As I’ve noted previously, the Reserve Bank Act does not provide for an acting Governor except when a Governor’s term is unexpectedly interrupted (death, dismissal, resignation or whatever), and –  consistent with this –  there is no provision in the Act for a new Policy Targets Agreement with an acting Governor (since a lawful acting Governor will only be holding the fort during the uncompleted term of a permanent Governor who would already have had a proper and binding PTA in place).    Spencer’s appointment appears to have been unlawful, and Robertson has now made himself complicit in this fast and loose approach to the law.   Consistent with the fast and loose approach, he allowed Spencer to sign yesterday’s Policy Targets Agreement as “Governor”, not as “acting Governor”.  He cannot be Governor, since under the Act any Governor has –  for good reasons around operational independence – to have been appointed for an initial term of five years.  And he isn’t acting Governor, since there is no lawful provision for him to be so in these circumstances.  At best, he is “acting Governor” –  someone purporting to hold that title.

The heart of yesterday’s announcement, however, was the two stage process for reviewing and amending the Reserve Bank Act.

Phase 1:

The review will:
• recommend changes to the Act to provide for requiring monetary policy decision-makers to give due consideration to maximising employment alongside the price stability framework; and

• recommend changes to the Act to provide for a decision-making model for monetary policy decisions, in particular the introduction of a committee approach, including the participation of external experts.

• consider whether changes are required to the role of the Reserve Bank Board as a consequence of the changes to the decision making model.

A Bill to progress the policy elements of the review, including on the details necessary to introduce a potential committee for monetary policy decisions, will be introduced as soon as possible in 2018. This will give greater certainty on the direction of reform in advance of the appointment of the next Reserve Bank Governor, currently scheduled in March 2018.

Phase 1 of the review will be led by the Treasury, on behalf of the Minister of Finance. The Treasury will work closely with the Reserve Bank who will provide expert and technical advice. An Independent Expert Advisory Panel will be appointed by the Minister of Finance to provide input and support to both phases of the Review.

Phase 2:
In line with the Government’s coalition agreement to review and reform the Reserve Bank Act, the Reserve Bank and the Treasury will jointly produce a list of areas where further investigations of the Reserve Bank’s activities are desirable. This list will be produced in consultation with the Independent Expert Advisory Panel.

This list, and the next steps for the review, will be communicated early in 2018. This phase of the review will incorporate the review of the macro-prudential framework that was already scheduled for 2018.

It is clearly intended as a pragmatic approach.  With a new Governor to take office in March, they want to get on with the specific changes Labour campaigned on  so that they come into effect as soon as possible after the new Governor is in office (realistically, it is still hard to envisage the new Monetary Policy Commitee making OCR decisions and publishing Monetary Policy Statements until very late next year –  perhaps the November 2018 MPS – at the earliest.)  It also appears to aim to separate the things on which the government mostly just wants advice on how best to implement changes they’ve promised, from other issues that may need looking at but where the parties in government have not taken a strong position.

But it still leaves me a little uneasy, on a couple of counts.

First, while it would be easy enough, after due consideration, to make limited changes to the Act to give effect to the desire to make explicit a focus on employment/low unemployment without many spillovers into the rest of the Act (I listed here a handful of clauses I think they could amend to do that),  I’m less sure that is true of the monetary policy decisionmaking provisions.    As the terms of reference note, if monetary policy decisions are, in future, to be made by a statutory committee, it raises questions about the role of the Bank’s Board –  whose whole role at present is built around the single decisionmaker (the Governor has personal responsibility for all Bank decisions not just monetary policy ones).

But how can you sensibly make decisions about the future role of the Board without knowing what changes (if any) you might want to make to the Bank’s other functions?  If, in the end, you leave all the other powers in the hands of the Governor personally, something like the current Board structure might still make sense, with some minor changes as regard monetary policy decisions.  But if you concluded that a statutory committee was also appropriate for financial stability issues, and that even the corporate functions should be governed in more conventional ways (Board decides, chief executive implements), there might be no place at all for a Board of the sort (ex post monitoring and review agency) we have now.    Decisions about the governance of an institution need to start by taking account of all the responsibilities of the institution, not just one prominent set of powers.

Second, it may be difficult to maintain momentum for more comprehensive reform once the government’s own immediate priorities have been dealt with.    On paper, it doesn’t look like a problem, but resources are scarce, legislating takes time and energy, implementing new arrangements for monetary policy takes time and energy, and it would be easy for momentum on the second stage to lapse (whether at the bureaucratic level, or getting space on the government’s legislative agenda).    That risk is compounded by an important distinction between phases one and two.    In phase one, the Treasury is clearly taking the lead, on behalf the Minister.  In phase two, we are told, “the Reserve Bank and the Treasury”  (the order is theirs) will “jointly” produce a “list of areas where further investigations of the Reserve Bank’s activities are desirable”.    A joint list raises the possibility of the Bank holding a blocking veto –  not formally, but in practice –  and where the Bank is more interested in (a) blocking other far-reaching changes that might constrain management’s freedoms, and (b) advancing whatever list of minor reforms it might have in mind itself.

Perhaps in the end much will depend on the Minister himself, and on the Independent Expert Advisory Panel he plans to appoint.  But the Minister of Finance will be a very busy man, and up to now he has shown little interest in reforms of the Reserve Bank legislation beyond the first stage ones.

What of the panel?  We’ll know more when we see what sort of people are appointed to it, and how much time they are being asked to give to the issue.

In a set of Q&As released with yesterday’s announcement the Minister indicated of the panel that “they will be individuals with independence and stature in the field of monetary policy, including governance roles”.   That is probably fine for phase one (which is monetary policy focused), but the bulk of the Bank’s legislation, and much of its responsibility, has nothing to do with monetary policy at all.  So if the panel is going to play a substantive role in the planned phase 2, I’d urge the Minister to consider casting his net a bit wider.

As to who might serve on it, there aren’t that many with what look like the right mix of skill, experience, and independence.  It is sobering to reflect that when the (still secret) Rennie review on related issues was done earlier in the year, not a single domestic expert was consulted.  I imagine they will want to draw mainly on people who actually live here.  But if possible, I would urge Treasury and the Minister to consider inviting Lars Svensson to be part of the panel –  as someone who has undertaken a previous review for an earlier Labour government, someone who supports an explicit employment focus, and someone with practical experience as a monetary policy decisionmaker.    David Archer – a New Zealander (and former RB senior manager) who now heads the BIS central banking studies department – might also be worth drawing on.

The third dimension of yesterday’s announcement was the Minister of Finance’s comments about the process for appointing a new Governor.    There I think he is making a mistake.

In his Q&As, the Minister noted that “the process for appointing a new Governor is in the hands of the Board”.

Newsroom reports that, when asked, Robertson noted that

“I’ve met with the chair of the board and he has assured me that process is underway and well under way and going well. I sought an assurance from him that any candidates he was interviewing would be ones who would be able to implement a change to policy along the lines we’re going, he expressed his confidence about that but in the end the process itself lies in his hands.”

Appointing a new Governor of the Reserve Bank is –  or should be –  the most consequential appointment Robertson will make in the next three years.  For a time that person will, single-handedly, wield short-term macro-stabilisation policy (which is what monetary policy is) and –  perhaps indefinitely –  will wield all the regulatory powers of the Bank.  Even if committees end up being established for both main functions, the Governor will have –  and probably should have –  a big influence on how, and how well, macro and financial regulatory policy is conducted over the next five years.

There has been a pretty widespread sense that the Reserve Bank in recent years has not been operating at the sort of level of performance –  on various dimensions –  citizens and other stakeholders should expect.  That isn’t just about substantive decisions, but about supporting analysis, communications, operating style etc.  And yet the Reserve Bank Board –  and chairman Quigley –  have backed the past Governor all the way (whether on minor but egregious issues like the attempts to silence Stephen Toplis, or on the conduct of monetary and regulatory policy).   But the new government claims to want something different.   The issue isn’t whether a potential candidate can, as a technical matter, manage the sort of phase 1 changes the Minister plans.  I’m sure any competent manager could.  The more important issues are around alignment and vision.  Is the Minister content to leave the process to the Board –  all appointed by the previous government – and take a chance on them coming up with someone who represents more than just the status quo?   At this point, it appears so.  Apparently, the selection process will not be reopened, even though the advertising closed months ago and the role of the Bank (and Governor) is to be changed.

It is quite an (ongoing) abdication by the new Minister. In (almost all) other countries, the Governor of the Reserve Bank is appointed directly by political leaders (Minister of Finance, head of government or whoever).   Those leaders no doubt take soundings in various quarters, but the power –  and the responsibility –  rests with the politician.   Here, Grant Robertson just rolls the dice –  relying on a bunch of private sector directors appointed by his predecessors –  without (it seems, from the tone of his comment above) a high degree of confidence in the outcome.  Perhaps he’ll like who the Board comes up with. But if he doesn’t, so much time will have passed that he’ll be stuck. He can reject a Board nomination, but they’ll just come back with the next person on their own list, evaluated according to their own sense of priorities etc.  It isn’t the way appointments to very powerful positions –  the most powerful unelected person in the country for the time being –  should be done.

And two, very brief, final points:

  • now that the government has changed, and the Minister who asked for the Rennie review of Reserve Bank governance issues has gone, surely there can be no good grounds for continuing to withhold Rennie’s report and associated papers?  It is not as if it is playing any role in the current Minister’s thinking.

    Newsroom also asked Robertson if he had seen a review of the bank undertaken by former State Services Commissioner Iain Rennie that was requested by former Finance Minister Steven Joyce.   He said he was yet to see it, but had asked Treasury about it.

  • we are told to expect a new Policy Targets Agreement when the new Governor is appointed.   Presumably, true to past practice, the first the public will know about it is when the document –  guide to macro-management for the next five years –  is released.    It would good if the Minister of Finance would commit now to proper transparency, including pro-active release (once the document is signed) of  relevant documents.  It would be better still if he would think about adopting the considerably more open, and rigorous, Canadian model.

    Less than a year since completing the last review of its inflation-targeting mandate, the Bank of Canada is starting to prepare for the next one in 2021.

    Consultations kick off in Ottawa on Sept. 14 with an invitation-only workshop of economists that will be webcast on the central bank’s website. It’s an early public start to the process, and comes amid a growing sense that a deeper look at the inflation target is needed after almost a decade of poor economic performance.

A more open approach to these issues – as practised in Canada for years – has much to commend it (even if I didn’t always think so when I was a bureaucrat.)