In 2021, Isaac Gross (
) wrote some Substack posts on the Next Top Central Banker riffing on the Next Top Model. Unfortunately, his link to part III didn’t work, so I had to track it down manually. What follows are my answers to his proposed questions. I found the questions in part III to be the most difficult, and from an MMT perspective, the questions from parts I & II were rather easy.Under what circumstances would you hike the cash rate by 50 basis points?
When I want to raise the inflation rate by half a per cent.
What with the benefit of hindsight was the biggest monetary policy mistake in the inflation-targeting era?
Not recognising monetary policy sets the term structure of prices in the absence of a demand or supply shock.
What in your opinion was the biggest monetary policy mistake made in real-time in the inflation-targeting era?
It is a little difficult but hard to go past any interest rate increases since the invasion of Ukraine and other supply-side issues like the shipping container, congestion and so on.
If you were trapped on a desert island and could only choose one data series to guide your monetary policy decisions what would it be? What if you could stretch your island budget to cover two data series?
The inflation rate, of course, and the underutilisation rate. Or maybe capacity utilisation in replace of the inflation rate.
If you were forced to choose between lowering the inflation target band to 1-2% or increasing the inflation target to 3-4% which would you choose and why?
Neither. The numbers are completely arbitrary. We’ve had a long-run inflation rate of about 4% hence all this hoopla over NGDP targeting, but the current mandate is between 2-3%. And the best way to get there is to park it at 2.5% & do whatever offsetting activities from OMOs & the like to keep it there.
In a future recession if the cash rate is at the zero lower bound would you prefer yield curve control or quantitative easing and why?
Whilst operationally different, in essence, they both achieve the same outcome, and I assume you mean the effective lower bound which is typically 0.25 in Australia but a choice was made to take it to 0.1. I actually called it at the time a day or two before the decision was made. It wasn’t necessary, but it was logical for the framework being used.
If the natural rate of interest was estimated to be negative for the next decade how would you change how the RBA implements monetary policy?
Well, here, we might have to dispute what the natural rate is. I imagine we have very different frameworks for what is “natural”. Nevertheless whether real or natural or whatever you want to call it, the RBA can hit its target within the corridor. I’d be hesitant to have a nominal negative rate as that would likely spur bank runs unless offset by very strong fiscal policy.
Under what circumstances would you implement a negative cash rate and why?
Funnily enough, I just answered that. Whilst I’d be hesitant, it would be a board decision
Suppose a member of the Reserve Bank Board starts leaking confidential information and backgrounding against the consensus position. What would you do?
Well,
1. I’d think they want my job & can do it better
2. Wonder why it hadn’t been discussed with me formally or informally.
3. Call a closed meeting so all grievances can be aired. Hopefully, that resolved it. If not,
4. If the person has been identified, get them removed from the board and
5. If they haven’t been identified, go to the Treasurer & request a new board.
This is a dramatic step but will be much less dramatic than radical transparency when the tabloids & media get hold of it. It is the safest & most conservative route to preserve the integrity of the institution. It may even radically shake up the board; who knows!
What would your response be to an outbreak of hostilities in the Taiwanese Strait?
Well, if this was on the cards, I hope we have returned much manufacturing to our shores. Otherwise, we may need to engage swap lines with our other biggest trading partners to keep our standard of living stable & consistent.
It’s a period of financial stress, and the CEO of one of the Major Banks calls you and discloses there is a high probability of them being insolvent in the next 4 weeks. What would you do?
Create a lending facility for them to recapitalise and restructure, and engage with APRA about employing stricter parameters about prudential regulations. Depending on context and circumstances possibly lobby for APRA to return to the auspices of the Reserve Bank. And/or encourage the policy-makers to nationalise that bank.
What would you do if a substantial fraction of Australians started transacting and/or borrowing in another currency?
If a cryptocurrency as they currently exist, engage with the ATO & other relevant organisations to call them a speculative asset. If another nation’s currency, I’d assess its value & possibly let the exchange rate adjust and do its job. Or I may use our foreign reserves to stabilise our exchange rate depending on the context. Beyond that, that sort of capital flight in Australia is more like to diminish that substantial fraction of Australian’s wealth than the collective wealth of Australians, and that’s their opportunity cost to bear.
As Governor what metrics would you want me to use when considering whether to re-appoint you to a second term?
That’s simple. Remove any demand or supply shock that occurred on my watch & see if I met my mandate of 3% inflation or under. Unless we have achieved frictional unemployment with effectively zero underemployment, I would not reappoint me. The same logic would apply if my term consisted mostly of deflation. In simplest terms outside of any shocks, an inflation rate of 0 to 3% and I should be reappointed.
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Somehow, I don’t think I got the job!
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