Thursday 17 February 2022

For a better Monetary Policy Committee

The terms of two of the three external members of the Monetary Policy Committee are due for renewal this year. 

My column in yesterday's New Zealand Herald (ungated here) suggests that the Board of the Reserve Bank of New Zealand might want to make sure that subject experts are welcomed, this time through.

A snippet:

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.

Dennis Wesselbaum and I surveyed the country's academic macroeconomists and asked them to rank-order each other for the impending vacancies; the two MPC members whose terms are coming due were also surveyed. Our response rate was a bit less than half; not too bad. I set each candidate in a pairwise race against each other candidate in a Condorcet process. 

Bob Buckle lost to no one. Good pick for a reappointment, if he'd be willing to serve. 

Arthur Grimes, John McDermott, Prasanna Gai, Viv Hall, Dennis Wesselbaum and Mark Holmes came in next. 

Peter Harris came in 13th, losing a pairwise contest to each of Bob Buckle, Arthur Grimes, John McDermott, Prasanna Gai, Viv Hall, Dennis Wesselbaum, Mark Holmes, and five others.

Good appointments will matter where there are worries about in-house capabilities. 

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