Reflections on the Reserve Bank of New Zealand's Monetary Policy Round

By Turner, Philip | The Reserve Bank of New Zealand Bulletin, July 31, 2017 | Go to article overview

Reflections on the Reserve Bank of New Zealand's Monetary Policy Round


Turner, Philip, The Reserve Bank of New Zealand Bulletin


The Reserve Bank of New Zealand occasionally asks external experts to attend monetary policy rounds, and seeks their observations as part of good practice peer review.

Dr Philip Turner was requested to attend the February 2017 monetary policy round, report on his assessment of the decision making process, and make recommendations where relevant.

This issue of the Bulletin presents Dr Turner's report back to the Bank.

Dr Turner is a former Deputy Head of the Monetary and Economic Department and a member of Senior Management of the Bank for International Settlements (BIS), where he worked from 1989 to 2016. Between 1976 and 1989 he held various positions, including head of division in the Economics Department at the OECD in Paris. In 1985-86, he was a visiting scholar at the Bank of Japan's Institute for Monetary and Economic Studies in Tokyo.

Dr Turner studied Economics at Churchill College, Cambridge, and earned his PhD from Harvard University. His fields of interest include monetary policy, international economics and central banking.

Author's introduction

I took part in the Reserve Bank of New Zealand's (RBNZ) forecast week and the Monetary Policy Committee (MPC) group discussions during 30 January-1 February 2017, with the further opportunity of listening to the Governor's press conference immediately following the announcement of the Official Cash Rate (OCR) decision and to the central bank's testimony in front of the Finance and Expenditure Select Committee (FEC) in Parliament. Especially useful were the many discussions I had with RBNZ economists, both before forecast week (notably at an RBNZ international conference on macro-prudential policy the previous week) and afterwards. During an earlier visit (February 2014), I had been asked to review the structural forecasting model (NZSIM, for New Zealand Structural Inflation Model) used by the Reserve Bank in its forecasting exercise. (1)

1 Polity Targets Agreement

The monetary policy mandate of the RBNZ is not a narrow one. The policy target is "to keep inflation between 1 percent and 3 percent on average over the medium term, with a focus on keeping future average inflation near the 2 percent target midpoint". Clause 4(b) adds further that "the Bank shall implement monetary policy in a sustainable, consistent and transparent manner, have regard to the efficiency and soundness of the financial system, and seek to avoid unnecessary instability in output, interest rates and the exchange rate". I have italicised these words because they describe a mandate that is realistic about what monetary policy can achieve. This mandate would not have been fulfilled in recent years, given the large shocks to international prices, by trying to keep the year-on-year inflation rate in New Zealand at close to 2 percent. To have achieved this, interest rates would have had to move by more than they have in recent years, and this would have created the unnecessary instability in output and the exchange rate that the RBNZ is enjoined to avoid.

This mandate requires the comprehensive analysis of how the real economy works, the monitoring of financial developments which are key for monetary policy, awareness of changes over time in monetary transmission, and the willingness to revise policy judgements as events unfold.

2 Research agenda

This broad mandate seems to be well reflected in the several topics that are under active study at the RBNZ. I know from earlier contacts that economists are encouraged to present their papers at outside conferences, and that in international forums the RBNZ "punches well above its weight" given its small size. RBNZ senior officials and economists have also made excellent contributions to central bank meetings at the BIS, including those in Asia where the RBNZ is especially active.

One question of fundamental importance to the MPC is clearly on the agenda of the RBNZ: how will monetary policy work in 2020? …

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