My submission to the Review of the RBA got a generous write by Shane Wright in the Fairfax papers today.
For those who want to see my submission and all its 38 recommendations in gory detail it is available here.
The two most substantive reforms proposed are:
Delegating monetary policymaking to a Monetary Policy Committee composed of internal staff and external experts in monetary policy
Remove financial stability as part of the RBA’s mandate for monetary policy, focusing the mandate on the dual goals of stable inflation and full employment only.
But I suspect neither of those two recommendations would be a surprise to readers of this substack, nor do I expect that my submission will be the only one recommending them.
Indeed there is a pretty good case that these reforms were the motivating argument to have a review in the first place. Perhaps I am naive, but I am somewhat optimistic that the Review will adopt some version of the two proposals and that it will be implemented to some extent by the Government.
Fingers crossed.
However I also took the opportunity to suggest a number of lower profile ideas, which could nonetheless be quite transformative. I will probably unpack some of the others in future posts, but here are two that I think are worth highlighting.
A better crystal ball
Prediction markets are an incredibly powerful tool for forecasting the future that work quickly and effectively. We already rely on markets for forecasting interest rates and inflation, however we could create prediction markets for other macroeconomic variables of interest such as the unemployment rate and GDP. Furthermore the RBA could actively subsidise these markets to increase liquidity and price discovery.
It would take a multi-agency effort to launch macroeconomic prediction markets, but it would be a genuine world-first innovation that could yield big policy and research dividends and something the RBA should actively consider.
There is tonnes of research that uses these market forecasts to estimate the impact of central bank actions on interest rates and the stock market. If we had high frequency measures of unemployment forecasts we could do the same for variables that we actually care about.
Nobody panics when things go according to the plan
The RBA is currently in the process of reviewing the unconventional policies it used when it hit the effective lower bound on nominal rates. This analysis should culminate in the RBA publishing a "break glass in case of emergency" plan for how they will stimulate the economy when interest rates next hit 0 per cent.
Preparing for an emergency and practising how policymakers should respond is an important aspect to disaster management. Publishing an explicit plan for how the RBA will respond the next time interest rates are constrained by the effective lower bound would improve policy outcomes by exposing the plan to external criticism and feedback, reducing policy uncertainty for households, firms and financial market participants, and help improve coordination with other policymakers.
Not every detail will be possible to plan for in advance, and some aspects of the plan will change in response to the nature of the next crisis. However, the RBA should have a public strategic plan for how they will next deal with the effective lower bound, the unconventional tools they will use and the metrics by which they will be operated.
Heir and a spare
Currently the RBA has only a single Deputy Governor serving as the Governor's right hand person.
I recommend that the RBA Act be extended to allow for multiple Deputies to be appointed. This would bring us inline with the Bank of Canada and the Bank of England, who both have several Deputy Governors.
More substantively it would also make it more feasible to appoint an external candidate to the RBA’s leadership, giving the Treasurer more optionality when selecting its executive team.
Appointing an external candidate under the status quo necessitates creating a leadership team in which one half has limited, possibly zero, experience with the RBA as a working institution. This creates a high degree of risk for even the most highly qualified of candidates as central banking has a steep learning curve.
However, the risk of appointing an external candidate to a central bank’s leadership team is mitigated if they are part of a larger executive team, in which the potential loss of instructional knowledge is more limited. While a Treasurer can in theory appoint anyone to run the RBA in practice they are limited to one of the hand-picked Assistant Governors or taking a high risk punt on an outsider. One of the best central bankers in the world, Ben Bernanke, moved from outside the Fed, to an apprenticeship as a deputy to Greenspan before being appointed as Chairman.
This is one possible explanation for why other comparable central banks have a stronger history of appointing external candidates to their executive teams. A larger executive group would also provide more opportunities to appoint candidates from a diverse array of backgrounds.
Great recommendations. Not sure I agree with a firm (2 year) timeline for returning inflation to target, or with cutting the number of meetings from 11 to 8 annually (but that's a quibble 😅).