Monetary policy requires expertise

Dr Eric Crampton
NZ Herald
15 February, 2022

It is hardly the highest-profile job in the country, but it is one of the more important ones.

The members of the Monetary Policy Committee of the Reserve Bank of New Zealand set the country’s monetary policy. The Committee sets the Official Cash Rate, recommends interventions like large-scale asset purchases, and assists in the production of the Reserve Bank’s forecasts and the Monetary Policy Statement.

There is arguably no bigger or higher-stakes job going in economic policy. It affects everything from the exchange rate and overall employment to house prices and inflation.

Monetary policy should not be interesting. The technocrats, in the best possible sense of the term, set monetary policy and keep inflation within bounds.

Monetary policy has become dangerously interesting. Two of the Committee’s positions are up for appointment or reappointment this year. Getting the right people in those positions will matter.

In every other sector, there are layers of officials to clear and Ministers to satisfy.

The Reserve Bank is rightly independent in achieving its Remit within the Reserve Bank Act. Central bank independence is meant to protect the country against the short-term interests of politicians of the day, who might choose to print too much money today while creating greater problems for future governments.

The Monetary Policy Committee’s decisions are final.

In 2019, the Bank appointed its first Monetary Policy Committee. Previously, decisions were made by the Governor. The move to a committee structure made sense. Appointments to the Committee are made by the Minister of Finance on the recommendation of the Board of the Reserve Bank.

But Treasury warned at the time that the Bank’s view on conflicts of interest could have some strange effects. The Bank viewed an active research interest in monetary policy or macroeconomics as being a conflict of interest. That view meant that every serious macroeconomist and monetary policy specialist working at the country’s universities was excluded from consideration.

It was a bizarre view.

The United States Federal Reserve has some of the country’s most eminent macroeconomic researchers helping in setting monetary policy. The RBNZ considered them to be too conflicted to be appointed.

Monetary policy, to the standard necessary for high stakes monetary policy decisions, is a highly specialised discipline. Even a doctorate in economics is not sufficient on its own. Macroeconomics is its own specialised field. Few microeconomists are able to stay current in the latest research in macroeconomics. And macroeconomics has its own specialised domains.

Being able to keep up to date with the latest research papers in macroeconomics and monetary policy requires staying on top of the latest methods. It requires people who are active in the field.

The Committee currently includes three Reserve Bank officials: Governor Adrian Orr, Deputy Governor Christian Hawkesby, and outgoing Chief Economist Yuong Ha.

It also includes three external members, the terms of two of which come due this year.

Treasury recommended that, “in future appointments to the MPC, looser criteria could be adopted that would allow for a broader field of potential nominees from the Board, if desired.”

It seems a good idea.

To find out who should be considered, Otago University’s Dr Dennis Wesselbaum and I asked every academic macroeconomist in the country, as well as the members of the Committee whose terms are coming due, who they thought should fill the two vacancies.

Among those who answered our survey, there was strong consensus about who should be considered for the coming vacancies.

Victoria University’s Bob Buckle, currently serving as one of the two external members of the Committee, was the economists’ top choice. In head-to-head competition against every other option, he lost to no one.

The Bank clearly did very well in making that appointment. The country’s academic macroeconomists, or at least those willing to answer our survey, overwhelmingly supported his return to the Committee.

Second-ranked was Victoria University’s Arthur Grimes, who formerly chaired the Board of the Reserve Bank. In head-to-head competition, he lost only to Buckle.

Motu’s John McDermott placed third, losing only to Grimes and tying with Buckle. McDermott previously served as the Bank’s Chief Economist.

The next ranked options, in order, were Auckland University’s Prasanna Gai, Victoria University’s Viv Hall, Otago University’s Dennis Wesselbaum, and Waikato University’s Mark Holmes.

We will not list the ranking of the remaining options. None of them asked to be considered for appointment or to be included in our survey. Many of them will focus on aspects of academic macroeconomics far removed from monetary policy and would never consider the role.

With one exception.

Former Council of Trade Unions economist Peter Harris currently sits on the Monetary Policy Committee. His term is due this year. Our survey respondents ranked him 13th overall. In head-to-head competition, he lost to each of Bob Buckle, Arthur Grimes, John McDermott, Prasanna Gai, Viv Hall, Dennis Wesselbaum, Mark Holmes, and five others.

Monetary policy is a specialist field requiring expert knowledge and PhD level training.

The next few years will test even the best. Covid’s incredibly difficult mix of supply and demand shocks requires very careful working-through. Important technical work is coming out of American universities integrating Covid shocks into more standard New Keynesian macroeconomic frameworks. The Reserve Bank, and the Monetary Policy Committee, will need to be able to stay at the cutting edge of that research.

The Committee’s job in the years ahead is too critical to be left to appointments that look political.

A strong research interest in macroeconomics and monetary policy should be a requirement for the role, rather than something that excludes capable potential Committee members.

New Zealand’s universities have a wealth of expertise on which the Bank could draw. The Minister of Finance, and the Board of the Reserve Bank, need to ensure that the next round of Committee appointments is up to the task.

Dr Eric Crampton is Chief Economist with the New Zealand Initiative. As a microeconomist, he most certainly does not consider himself qualified to serve on the Monetary Policy Committee.


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