Wednesday, 4 September 2019

NZIER Economics Award - and an implicit critique? [Updated]

Last night, Motu's John McDermott was named as this year's recipient of the NZIER Economics Award. 

My former colleague Les Oxley read out the citation, which I copy below:
Dr John McDermott has been the foremost macro-economist in New Zealand policy circles for at least the past decade. He was Chief Economist and Assistant Governor at the Reserve Bank of New Zealand from 2007 to 2019. Over this period, John has been a beacon in ensuring that economic rigour is brought to bear on policy formulation. He showed similar qualities in his prior roles in the private sector (the National Bank of New Zealand) and at the IMF.

John began his senior role at the Reserve Bank of New Zealand just prior to the onset of the Global Financial Crisis. It is difficult at times such as this to draw on experience of prior crises because, by nature, crises are rare and each differs from the one before. It is at times such as this when a combination of a deep understanding of economic forces plus common sense is required. The team at the Reserve Bank, led by Dr Alan Bollard and supported by the macroeconomic expertise of John McDermott and his colleagues, ensured that the GFC impinged only marginally on New Zealand (relative to most other countries).

John’s contributions have shone through not just in his direct contributions to policy-making (such as during the GFC) but also through his championing of economic rigour amongst his colleagues within the department that he led at the Bank. Policy-relevant research from experienced colleagues such as Ozer Karagedikli and Christie Smith are relevant examples. So too is the work that John undertook with Michelle Lewis. With Michelle, and subsequently with Ozer, John showed the importance of the specification of the official inflation target for inflation expectations and thence for inflation outcomes. These papers are important examples of the need to design appropriate institutional constructs when making public policy.

John has also contributed in a very major way – together with Prof Viv Hall – in documenting and understanding New Zealand’s business cycles. Macroeconomics has always had a major focus on the control of business cycles. However, prior to control is the need for understanding. The important work that John and Viv have done has been to identify when and why certain business cycles occurred in New Zealand – both at the macroeconomic and regional levels.

John’s academic credentials are undisputed. What sets him apart from many of his highly trained academic colleagues is his ability to bring those academic credentials to play in shedding light on real world problems facing central bankers and other macroeconomic policy-makers. His expertise in this regard has been recognised across the Tasman through his role since 2016 on the Australian Treasury Expert Panel on Forecasting Methodologies.

Since leaving the Reserve Bank of New Zealand in early 2019, John has maintained his connection both to policy and to research through his two key roles: as Executive Director of Motu Economic and Public Policy Research, and as Senior Consultant, Wigram Capital Advisors Limited. The latter role involves significant interaction with developments in the Chinese economy.

John has set an example to colleagues and institutions alike: top class economists can make very important contributions to real world policy-making, while good economic policy requires the input of rigorous thinking from excellent economists. John has set a very high standard over an extended period showing how this match can work for all concerned.
Ozer Karagedikli is now with the South East Asian Central Banks (SEACEN) Research and Training Centrre.

Christie Smith left RBNZ in May 2019 and is now with the Electricity Authority.

Michelle Lewis is now with the Reserve Bank of Australia.

John has a PhD from Yale.

The RBNZ's current Chief Economist, Yuong Ha, has a Bachelor of Commerce (Honours) from Auckland.

The citation's noting of the importance of rigorous thinking from excellent economists for good economic policy, and the noting of those who have left the RBNZ since Orr came in, seems a bit pointed.

Update: A correspondent emails me to note that the serious researchers at RBNZ were on the way out prior to John's departure, and that the research culture there was in decline over a longer period. The problem, according to the correspondent, goes back over a couple of Governors and is not new to Orr. I have every confidence that my correspondent knows far more about it than I do, and so I have updated my views.

Part of the implicit pay packet for serious macro/money people at reserve banks is getting to do research that interests them, but that might not have obvious or immediate application in local policy.

Keeping around the folks who are able to quickly understand the point of leading edge technical papers in macro/money means giving them scope to play. But that always makes for a tension in smaller central banks in getting that balance right.

It seems the RBNZ over the past few years has set the balance such that a lot of the serious macro researchers have left. That might not matter over the short to medium term, but having folks around and on call when heavy lifting needs to happen in a hurry can matter, and it can matter suddenly, and you can't know in advance when it will matter.

And it especially matters in a small country where it is hard to point to academic macroeconomists who pay much attention at all to anything relating to macro/money policy in New Zealand. Hard to name more than a handful. There isn't a big reserve army of those researchers sitting in the universities on-call if needed.

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