NZIER on who should set the cash rate

NZIER have published this note:

The Greens’ idea to use the Reserve Bank Board to make monetary policy might improve decision-making but using a board designed to represent industry, risks compromising the Reserve Bank’s independence and the goals of monetary policy.

So they’re saying collective decision making may be better, but not if those deciding are not independent.

Responsibility for monetary policy rests solely with the Governor of the Reserve Bank of New Zealand. Twenty-five years ago, monetary policy was tied to the neck of one person to maximise accountability for inflation targeting. Today most countries have adopted inflation targeting but use a board rather than a single person to set interest rates.1

Groups tend to make better decisions than individuals by using a wider range of information. That often leads to less extreme decisions.2 And decision-making by groups is more effective because members of the group contribute a greater variety of perspectives.3

I would note it can lessen accountability though.

Recently the Reserve Bank of New Zealand set-up an internal Governing Committee, comprising the Governor, Deputy Governors and an Assistant Governor, as a group to assist decision-making.

These innovations help the Reserve Bank form better decisions from a wide range of information and perspectives. That means the distinction between a single decision-maker and decision-making by a board is blurred by current Reserve Bank practice. 

So we expect better monetary policy from a board rather than a single person. But given the way policy is currently set these gains are unlikely to be large.4

In other words, the decisions are in practice collective ones.

Moving to a board structure has practical implications. We agree that like elsewhere in the world, releasing the minutes and voting record of the committee improves transparency.


But already New Zealand has a very transparent central bank. According to one measure, New Zealand ranks as the second-most transparent central bank globally.5 Publishing the board minutes is helpful but the Reserve Bank of New Zealand does not have a transparency problem. 

But let’s not pretend there is a huge problem.

It’s not clear what making the decision-making board more representative of the wider economy might achieve.

If the problem is improving decision-making, NZIER’s view is the Reserve Bank already receives considerable input from all parts of the economy as part of its regular information gathering process.

Including exporters and manufacturers on a decision-making board seems targeted towards a solving a different perceived problem: changing the objectives of monetary policy.

But good monetary policy is not about promoting exports: it’s about targeting inflation.
Ultimately, monetary policy is a technical activity. So any decision-making board needs the professional advice and experience of career economists that understand the economy.

Basically the proposal is an attempt to change the purpose of monetary policy by stealth.

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