Help wanted: do you want to be a Reserve Bank Board member?
Plus, calibrating the peak in official interest rates; and Australia’s Q4 wages and GDP growth
Treasury has hung out the help wanted sign, issuing an expression of interest for appointees to the RBA Board (as first reported by the eagle-eyed Shane Wright). The terms of two Board members, Wendy Craik and Mark Barnaba, expire this year. There may also be prospective changes to the membership of the Board flowing from the RBA review, not to mention the role of the Board itself.
This is a significant change in process for Board appointments, which are made by the Treasurer. Following the controversy over Robert Gerard’s appointment to the Board in 2003, the Rudd Labor government instituted a register of eligible persons maintained by Treasury and the RBA from which appointments were meant to be made. It is said that the Treasury Secretary and RBA Governor have jointly vetoed some proposed appointments, although that (and other evidence from the FOI process) would seem to suggest that appointees need not be on the register to be considered. Bloomberg previously sought to FOI the register, but the names were redacted.
The EOI process is welcome insofar as it means the official family will serve as less of a gatekeeper for Board appointments. It leaves the status of the existing register unclear. The EOI states that:
Candidates for non-executive board member positions should have knowledge and/or experience in economics, labour markets, financial markets, industry or public policy formulation. They should also have strong communication and strategic thinking skills.
The emphasis on knowledge and skills is a welcome change from ticking representative boxes. It is also a welcome improvement on secret lists maintained by the official family. The Treasurer presumably signed-off on the EOI process. It could also be that the government and RBA are trying to get out in front of the likely recommendations of the RBA review, which has identified the composition of the Board as a key issue.
The RBA has form in this regard. It introduced a package of transparency measures in November 2007 just as the Rudd government assumed office. The ALP in opposition had expressed an interest in making the RBA more transparent. By front-running the new government, the RBA was able to implement these changes on its own terms (although they were no less welcome for that). Governor Lowe’s formalisation of the previously informal economist liaison processes can also be viewed in this light.
No doubt the RBA review will have a lot more to say about the role of the Board and the process for Board appointments. It is good to see there is already movement in the direction of focusing the Board selection process on skill sets rather than seniority.
Smooth operator: calibrating the peak in official interest rates
Noah Smith once claimed there is ‘no well-accepted theoretical justification for smoothing interest rate increases’:
In fact, there is an extensive literature both quantifying the magnitude of interest rate smoothing, as well as offering compelling reasons why central banks engage in it. It is almost impossible to model official interest rates without including a smoothing parameter. The smoothing term measures the dependence of the current observed interest rate on interest rates in the past.
Markets are currently preoccupied with calibrating official interest rates based on empirical interest rate rules with a view to timing the peak in the interest rate cycle. Most of these calibration exercises call for much higher interest rates now than current rates. For example, the Taylor rule implies that the Fed funds rate should have been around