Photo credit: Canberra Times
Treasurer Jim Chalmers announced the terms of reference for the review of the RBA, together with the review panel. The panel will report in March 2023. While a somewhat compressed timetable compared to the June 2023 reporting date floated previously, it gives more time for the government to consider its response before making a decision on appointing the next RBA Governor when Phil Lowe’s term expires in September 2023. An important task for the next Governor will be to implement those recommendations of the review the government ultimately agrees to. The Treasurer also announced that Mark Barnaba’s term on the RBA Board will be extended by 12 months.
The terms of reference for the review are as follows:
The RBA’s objectives, as outlined in the Reserve Bank Act (1959) and in the Statement on the Conduct of Monetary Policy, including the continued appropriateness of the inflation targeting framework.
The interaction of monetary policy with fiscal and macroprudential policy, including during crises and when monetary policy space is limited.
This will include Australia’s macroprudential governance arrangements, but exclude APRA’s statutory role or functions.
It will also assess the following aspects of the RBA:
Its performance in meeting its objectives, including its choice of policy tools, policy implementation, policy communication, and how trade-offs between different objectives have been managed.Its governance (including Board structure, experiences and expertise,
composition and the appointments process) and accountability
arrangements.Its culture, management and recruitment processes.
It is significant that the RBA’s statutory objectives and the role and composition of the Board (which are defined in the RBA Act) are in scope and not just the Statement on the Conduct of Monetary Policy. This is more far-reaching than similar central bank reviews overseas, which typically take the existing statutory mandate as given and focus more narrowly on monetary policy strategy and implementation. But given that the RBA has not been systematically examined since 1981, a more thoroughgoing review is called for.
Before the review was announced, there was hesitation on the part of some about opening-up the RBA Act to change. In particular, there was concern this might provide an opportunity for some interest groups to push for broadening the RBA’s mandate to include objectives that should be extraneous to monetary policy. But to the extent that there is any pressure to broaden the RBA’s mandate, the review is a good opportunity to confront those demands and explain why they are misplaced. We should not shy away from that debate because it is important to periodically reaffirm what monetary policy can and cannot be expected to do and to define its place within the overall division of labour between macroeconomic and other policymaking institutions.
My only quibble with the TOR is the reference to ‘when monetary policy space is limited.’ As I have often argued here, monetary policy is not constrained by the zero lower bound and the mistaken belief that it is has been a source of significant monetary policy errors around the world. It will be interesting to see what stance the review panel takes on this issue and monetary-fiscal interactions. But more generally, I would expect the review to broadly uphold the notion that monetary policy should carry the burden of demand management, freeing fiscal policy to focus on structural and distributional issues.
Monetary and macroprudential policy interactions will likely be a contentious area and there is considerable scope to better define the relationship between the two. As I have maintained in this space previously, there have been occasions, most notably the period from late 2014 to 2018 when monetary and macroprudential policy were not only as cross-purposes, but arguably suffered an indeterminacy problem, where the RBA was having to ease more aggressively to offset APRA and ASIC’s actions in restricting the mortgage lending channel for monetary policy transmission.
The review panel of Carolyn Wilkins (former BoC Deputy Governor), Renee Fry-McKibbin and Gordon de Brouwer, is well-placed to execute on the terms of reference. Wilkins studied with Pierre Siklos, who is well known for his contributions on central bank institutional arrangements and monetary policy. Gordon co-authored an important paper on the RBA’s reaction function, which I adapted when estimating an implied nominal income targeting rule for the RBA. Renee has done important work with Adrian Pagan on sign-based identification of SVAR-models.
It will be interesting to see what framework the review puts in place for public consultation and submissions.
Q2 wages outlook
Conditional on our forecast for the Q2 trimmed mean inflation rate of 1.6% q/q, our model has the Q2 wage price index coming at 0.9% q/q and 2.8% y/y compared to 0.7% q/q and 2.4% y/y in Q1. The model has mostly been overstating wages growth since Q1 2021, so that forecast should be treated with some caution. The persistence term in the model has been increasing somewhat over time, pointing to increased inertia in wages growth. The forecast reflects, but still probably understates, that increased inertia. That said, there is scope for wages growth to suddenly accelerate as it catches-up to labour market conditions. The RBA was forecasting the Q2 WPI at 2.7% y/y, but there will be an update to this forecast in the August Statement on Monetary Policy ahead of the Q2 WPI release on 17 August and it would not be surprising to see the RBA’s estimate raised to something closer to our model’s estimate.
ICYMI
Since Joe Stiglitz has been visiting Australia, it is a good time to review some of his public policy recommendations.
The Fed can fight inflation and unemployment — Here’s how.
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