See Part I of Australia’s Next Top Central Banker.
While the monthly dance of the cash rate is the RBA’s traditional monetary policy tool, since March 2020 the RBA has inhabited the world of unconventional monetary policy. If the experience of other countries is any guide these unconventional tools are going to be a mainstay for years to come and something the next Governor will have to grapple with.
If you were forced to choose between lowering the inflation target band to 1-2% or increasing the inflation target to 3-4% which would you choose and why?
Frankly, the answer to this question is obvious.
One of the biggest l̶e̶a̶r̶n̶i̶n̶g̶s̶ lessons from the past decade of macroeconomics is that inflation targets are too low in most OECD economies. To mitigate the issues caused by the effective lower bound on nominal interest rates serious consideration should be given to modestly raising the inflation target. While there are good reasons to be cautious about changing the inflation target, if forced to choose between increasing or decreasing it the former is by far the better option.
However a large number of crazy people seem to want to lower the inflation target - some as low as 0 per cent! Perhaps these people have an inexplicable preference for the endless quantitative easing that such a change in target would necessitate. But they are clearly wrong on the merits and any candidate who agrees with them can be politely written off.
Bonus points if you advocate for an even higher rate by changing the target variable to the PCE deflator.
In a future recession if the cash rate is at the zero lower bound would you prefer yield curve control or quantitative easing and why?
During the Covid-19 Crisis Australia has implemented two forms of unconventional monetary policy. The first was yield curve control which effectively increased the maturity of the zero interest rate peg from overnight interest rates out to a term of 3 years. The second was more the “traditional” unconventional policy of quantitative easing which involved purchases of longer dated bonds measured by quantity rather than set by price (or yield).
These policies are quite similar and it would take a keen student of monetary policy to distinguish between them an advocate coherently for one over the other. Weeding out those that cannot is important to make sure we have a Governor who can tease apart the differences and the relative costs and benefits from each policy.
Bonus points if you can discuss the issue of government debt without mentioning MMT
If the natural rate of interest was estimated to be negative for the next decade how would you change how the RBA implements monetary policy?
Conventional monetary policy in Australia is premised on the assumption that the natural rate of interest is positive. If interest rates are above zero the RBA has scope to vary the cash rate to manage the economy. While an abnormally large downturn or recession may drive nominal interest rates to the zero lower bound we generally expect these times to be the exception and not the rule.
However interest rates have been trending downwards for several decades. And there is evidence that this trend might continue. If it did we could be looking to a future where interest rates are close to zero for years if not decades at a time. This would require the RBA to change how it uses the power of the digital printing press as even the RBA’s unconventional policies are largely premised on the assumption that interest rates will eventually rise back to a normal (ie positive) level. For example promising to keep 3 year bonds at 0.10 per cent doesn’t mean much if the entire yield curve is close to the zero lower bound.
There are several alternatives that have been floated that would circumvent this problem. Helicopter drops, foreign exchange interventions, negative interest rates etc. A good candidate should be able to debate the merits of all of these policy options and under what conditions they would be implemented.
Bonus points if you promise to use an actual helicopter.
Under what circumstances would you implement a negative cash rate and why?
The Reserve Bank of Australia currently takes a very hard line against negative interest rates. They are in their words “Exceptionally unlikely”. But this view is not shared by other central banks around the world with interest rates being set below zero in countries such as Japan, the Eurozone and Switzerland. One can only assume that other policymakers have weighed the relative costs and benefits of such an approach differently.
Any interviewee should be able to describe their view on the merits of negative interest rates and under what circumstances circumstances they would agree to it implement them. Those circumstances should exist for even the most reluctant candidate - for example should every other country go negative we would be hard pressed not to follow suit.
Bonus points if you cite research on the experience of other countries that have deployed negative interest rates.
Part III concludes the interview.