The Reserve Bank of New Zealand is known for punching well above its weight in the central banking world. Some 30 years ago, it was the first central bank to adopt an inflation targeting regime, starting a trend that was followed by institutions in many of the world’s largest economies.
But the RBNZ was different from some of its peers, in that it did not have external members sitting on its rate-setting committee. That changed in April 2019, when three external members joined a newly formed monetary policy committee (MPC). This modification came as part of a series of wide-ranging reforms, including a move to a dual mandate and a wide range of structural changes, all pushed through by a newly elected coalition government.
In one way, perhaps, the RBNZ was playing catch-up when it welcomed external members to its monetary policy deliberations. Under its governor, Adrian Orr, the RBNZ’s management now welcomed the move to include external members. But the imminent arrival of the new members prompted the RBNZ’s staffers – especially the 30 or so in its economics department – to think through how the change could be best managed to ensure the new regime realised its full potential.
“We didn’t know who we’d be getting as new members,” says Rebecca Williams, head of the economics department’s policy analysis team. “But we knew we wanted a robust, productive debate, rather than people just talking over each other. We wanted to ensure that there was the best possible debate involving external members and that we could utilise the diverse viewpoints that they bring. Everyone was on board with that.”
The economists thought of a way of doing this: they would write a handbook, setting out the RBNZ’s approach to monetary policy. They approached Orr, then assistant governor, head of economics John McDermott, and other senior staff to see how they would respond to the idea – a task made simple by the RNBZ’s relatively flat organisational model. The economics team were encouraged to write the monetary policy handbook, and nine economists had the task of writing individual chapters. To do so, they convened meetings of a high proportion of the bank’s economists, seeking to capture the relevant institutional knowledge of the entire RBNZ.
The economists were pleased with the new handbook as it began to take shape. They kept in close contact with Orr, McDermott and other senior staff, who approved the work in progress. But a new idea struck the RBNZ, says Williams: why restrict the handbook to the new MPC members and central bank staff? The handbook could be published so that every New Zealander could read how the central bank set monetary policy. “Orr and McDermott were both very keen that we published it,” she says.
The economists now had to work with the RBNZ’s communications team, led by Naomi Mitchell, to put their findings into a form that would be as accessible as possible to a wide audience, while giving the new MPC members the information they needed. RBNZ staff members were generally very enthusiastic about the proposed handbook, but there was one recurrent doubt: “Some people were worried that if you laid everything we thought we knew about monetary policy out, then it would be hard to change it,” says Williams. “But we said: ‘No – the whole point is that we will keep changing this as you go and as our understanding of monetary policy evolves.’” That argument proved convincing.
The RBNZ also made a second change to its procedures as it moved towards the new monetary policy framework. The new regime included a requirement that the MPC publish a summary record of each meeting, and the bank decided that it would start publishing these simultaneously with its release of its monetary policy decision.
As with the decision to publish the handbook, this move came naturally, says Williams: “It’s a culture – we tend to think: ‘Well, why wouldn’t we put things out there?’” The first account was published in May 2019, when the RBNZ’s new MPC took its first decision. The rapid publication of the account increased the amount of information available to the public and to market participants, even as it increased the workload of the RBNZ economist entrusted with writing it.
The handbook was published a month earlier when the new members joined the MPC. Its 85 pages started by explaining the RBNZ’s monetary policy framework, before setting out principles for good monetary policy-making. It then explained the process by which monetary policy decisions were made, laid out the RBNZ’s objectives, and gave a detailed but concise account of New Zealand’s economy. Another chapter explained the RBNZ’s understanding of the transmission for monetary policy and the handbook closed by summarising what factors were at play in a monetary policy strategy.
We said from the start we wanted [the monetary policy handbook] to be a living document
Rebecca Williams, RBNZ
Each of the members of the MPC carries the handbook into meetings. “The one-page summary of the transmission mechanism is probably the one that gets used the most,” says Williams. “The first chapter on the framework also gets referred to a lot.”
The economics team also asked MPC members and RBNZ employees what they thought might need to be added to the handbook. As a result, the handbook is already set to change, she says: “We said from the start we wanted it to be a living document.”
One set of revisions will be prompted by feedback from the central bank’s staff members and MPC members. “We might add a chapter later this year on unconventional monetary policy, though we haven’t had need for that in New Zealand yet. We just want to be prepared. Some members want detail on costs of deflation as well as those of inflation, as the first version only included the latter,” she tells Central Banking.
Another set of changes will aim to make the document more accessible to the bank’s stakeholders. The RBNZ wants to review the handbook’s language over time, making less use of technical terms. It is also considering other ways of making some of the information clearer to a wider audience, for example, via online animations.
A variety of groups in New Zealand’s civil society gave the handbook a positive reception, including the business community, teachers and journalists. “The quality of interviews has gone up a lot – we were pleasantly surprised by that,” says Williams.
The Central Banking Awards were written by Christopher Jeffery, Daniel Hinge, Dan Hardie, Rachael King, Victor Mendez-Barreira, Alice Shen and William Towning