By BRIAN FALLOW
WELLINGTON - The New Zealand system of having one person responsible for monetary policy, rather than a committee, has a lot going for it, says visiting American economist Michael Woodford.
Professor Woodford, from Princeton, is the current professorial fellow in monetary economics at Victoria University.
The forthcoming Government-commissioned review of the Reserve Bank will include a look at its decision-making processes and accountability structures.
There is speculation in the markets that the upshot may be to shift responsibility for setting monetary policy from the governor alone to a board including external members as well as senior Reserve Bank staff.
"The obvious appeal of a committee is that you can be more confident that more points of view are represented at the table when decisions are made," said Professor Woodford.
But the need for clear, consistent and credible signals of where monetary policy was heading "creates an advantage in having a single person finally making the call, and being responsible for communicating and explaining it to the public."
The conduct of monetary policy involved much more than occasionally adjusting an overnight interest rate, he said. What mattered was where the markets expected short-term rates to go over the next few months.
"If the central bank isn't steering those expectations it doesn't have a very big lever to affect the economy," Professor Woodford said.
While a committee could decide on the immediate question of whether to move interest rates, it was much more difficult to get agreement on what view to communicate on the likely course of policy down the line.
Secondly, Professor Woodford said, a consistent and coherent view from one announcement to the next was more likely if one person had to explain it and stand behind it.
"It is easier for a committee not to feel tied by what it might have announced previously. At least, that is my experience of the committees I serve on.
"I am usually appalled at the lack of continuity from one meeting to another and the extent to which decisions some temporary majority have made have no effect on how anyone seems to be thinking next time."
Consistency did not mean, of course, that the central bank would not adjust its policy in the light of new information about the economy's performance, only that it did so in predictable ways.
"The projections the bank makes at one point in time cannot be promises. They should not be regarded as tying the hands of the bank because there will always be new developments. But as you look at the record over time you should be able to believe that the initial signals meant something."
Professor Woodford regards the Bank of England's monetary policy committee as a bad model.
"Not only is there a committee, there is a lot of stress on the autonomy of the committee members. Which way they voted is publicised. They all have their own staff providing them with their own independent forecasts because it is thought to be really important they each have their own independent judgment," he said.
"But that leads to a lot of attention among the public on the differing opinions of these people. It makes it very hard to get out a single clear message about what the bank as a corporate entity has decided.
"And indeed it may make it hard for the bank as an entity to have a clear line and to commit itself much in advance to what the next decision might be."
The Reserve Bank of Australia, which also made policy by committee, avoided some of those problems by drawing a veil over who voted how.
But it gave markets much less information on the economic outlook and its policy direction than its NZ counterpart.
"The New Zealand Reserve Bank is an innovator in developing these more open methods of communicating with the private sector about how policy is likely to develop in the future," Professor Woodford said.
These experiments were positive and promising, "and I would expect that further practice should allow both sides to become more skilled in making it work well."
One hand on reins backed by US economist
AdvertisementAdvertise with NZME.