Traditionally the keys to Martin Place are handed out in a somewhat murky process run by the Treasurer. A long apprenticeship toiling on the upper floors of the RBA being the main prerequisite to success. But what if we had an open selection process complete with aptitude testing, awkward team building exercise and, most importantly, a gruelling multi-part interview?
The next few posts are going to explain what such an interview should ask prospective candidates, how they should best be answered and most importantly how you can score a bonus point or two along the way.
Do you have what it takes to be Australia’s Next Top Central Banker?
Part I: Taking a stance on policy
Perhaps the most obvious part of the job is setting the stance of monetary policy. Candidates should have a clear, consistent and (most importantly) correct view on how the RBA deploys it’s primary tool - which is it leads off the start of the interview process.
Under what circumstances would you hike the cash rate by 50 basis points?
The RBA hasn't hiked the cash rate by 50 bp (double the standard 25 bp adjustment) since we were bouncing back from the depths of the early 1990s recession. We actually haven’t even seen a single cash rate hike for over a decade! Cash rate increases might be a distant memory at the moment, but for those old enough to remember they are always unpopular decisions that both households and politicians decry. Hiking mortgage rates by 50 basis points for the first time in decades would be a very … courageous decision.
But it might be a necessary one. Certainly a case could have been made for it when inflation was spiralling out of control in the pre-GFC mining boom. So when would you deploy the double hike? If inflation was running at 4 per cent? 5 per cent?
Describing the economic circumstances in which they would support lifting the cash rate by 50 basis points gives candidates the chance to demonstrate how they would implement monetary policy under trying conditions. Candidates should describe the circumstances in as much detail as possible.
Bonus points if you would commit to double hiking during an election campaign.
What with the benefit of hindsight was the biggest monetary policy mistake in the inflation targeting era?
Crafting policy in real time is always fraught with difficulty and mistakes will inevitably occur. But by re-examining historical performances gives us a chance to learn from the past. It also clarifies what outcomes we desire from monetary policy going forward - it’s only by defining our mistakes can we recognise our successes.
While the RBA has an enviable track record in comparison to most other central banks it is not a perfect one. By nominating which policy decisions were retrospectively wrong, candidates can demonstrate what mistakes they would try their best to avoid while helming the ship.
Bonus points for this question if you were personally involved in the policy mistake and repent during the interview.
What in your opinion was the biggest monetary policy mistake made in real time in the inflation targeting era?
Hindsight is 20/20. But some mistakes are obvious enough they are should have been recognisable in real time, even with the limits of noisy data and partial information. A higher bar than the first question, and one that requires the candidate to have a solid grasp of what was happening at the time.
Bonus points for this question if you opposed the decision at the time and can FOI the documents to prove it.
If you were trapped on a desert island and could only choose one data series to guide your monetary policy decisions what would it be? What if you could stretch your island budget to cover two data series?
What will be your guiding light as Australia’s top economic manager? Frankly, it would be hard to walk past inflation given its prominence in the mandate (though a good candidate should choose the trimmed-mean over it’s more flighty headline measure).
But what if you are given a second? Perhaps you should focus on the second part of the mandate and choose a measure of real activity such as the unemployment rate - though that might be less useful if you don’t have a firm grasp of what the NAIRU will be. A more crisis-minded candidate might choose a quick moving financial variable (such as spreads on bank debt or the Australian dollar) so they can respond quickly to sudden shocks. Either way a candidate's answer will help illuminate how they will interpret the gyrations of the Australian economy and what outcomes they will try to prioritise as governor.
Bonus points if you choose data on cash rate futures and hand over all monetary policy to the wisdom of Australia’s finest derivative traders.
In part II the interview shifts to questions on unconventional policies and structural changes to how monetary policy is implemented.