Innovation Central-Bank Style: Engaging with the Research Community

This post was written by Carolyn Wilkins, Senior Deputy Governor of the Bank of Canada.

During the Great Depression, John Maynard Keynes wrote “It’s astonishing what foolish things one can temporarily believe if one thinks too long alone, particularly in economics.”

Today, this is truer than ever, and it’s a principle the Bank of Canada is keeping top of mind as we tackle some tough policy and research questions. As I explained in a speech last week, we’ve been thinking a lot lately about “innovation, central-bank style.” That means taking on board the lessons from the most recent global financial crisis, questioning old answers to policy questions and changing our corporate culture to remove obstacles to new ideas. 

It starts with a clear research agenda. Here are some highlights:

• While we’re committed to our inflation-targeting framework, we’re taking a hard look at it ahead of the official renewal in 2016. The questions we are asking are: Should we consider targeting a rate of inflation higher than 2 per cent? Should we continue to use CPIX as our operational guide? How do we incorporate financial stability risks into the conduct of monetary policy?
• We’re analyzing the effectiveness of unconventional monetary policy used by various countries since the crisis. We’ve just published staff discussion papers on quantitative easing, forward guidance and negative interest rates.
• We’re making a big investment in economic modelling and using new analytical methods like big data and behavioural economics.
• We’re preparing to confront “alternative futures” such as China’s new role in the international monetary system; new payment methods like Apple Pay and PayPal; disruptive technologies and business models like Bitcoin, peer-to-peer lending and others in the sharing economy.

To get to the right answers to these questions, we need to reach out to people beyond our own four walls. If we don’t, we leave ourselves open to confirmation bias and tunnel vision—and we risk missing out on insights that can ultimately lead to better outcomes for Canadians.

That’s why I’m reaching out to you—those who follow and contribute to Worthwhile Canadian Initiative. The Bank wants to expand and deepen its engagement with the broader research community of private sector economists, academics and policy-makers by sharing more of its research and analysis in early stages, collaborating on research, and fostering an ongoing, constructive dialogue.

One way we do this is by hosting conferences and workshops to share our research and exchange views. Earlier this year, we held a conference on disappointing global growth rates. And we’re getting ready for others—on e-money, inflation targeting and the nexus between financial stability and monetary policy. More will come over the next few years.

Internally, we’re making sure our researchers have the intellectual freedom to pursue innovative lines of inquiry, even if that sometimes means challenging the prevailing orthodoxy or official Bank views. We recently changed our publishing process to build in more independence for our researchers and to more clearly distinguish between staff views and official outputs.

We also just launched a new type of publication called Staff Analytical Notes, giving external stakeholders greater, more timely access to the analysis behind our current policy thinking.

We’re continuing to find ways to collaborate more with experts: in addition to our existing Fellowship Program, we launched a Visiting Scholar Program this fall, naming three outstanding academics to work with our staff on innovation-related policy questions.

Last year we also introduced the annual Graduate Student Paper Award to promote high-quality research in subjects related to the Bank’s mandate.

And to further encourage the next generation of researchers, we now offer scholarships for indigenous students and students with disabilities. We have a new student competition in the works called the Governor’s Challenge, in which teams from different universities present their economic analysis and monetary policy recommendations to a panel of experts.

These are some of the ways we’re putting innovation at the centre of our strategic corporate plan. We recognize that all organizations face natural obstacles to innovation, and central banks are certainly no exception. But in a fast-changing world, standing still is a risky strategy.

 

Comments

[Avon Barksdale]

The Bank of Canada should keep three lessons in mind about central banking:

1) Humility: The economy is complicated. Any attempt to fine-tune complicated and poorly understood systems can itself be the the source of huge problems.

2) Follow rules: Monetary policy works best when it follows predictable rules rather than discretion or the last fad of the day. The economy works based on expectations and moral hazards. When the market starts hanging on every word of the central banker, parsing every inflection in his speech, the Bank itself can create instability as people attempt to anticipate the Bank's next move.

3) Limited power is the price of political independence: If the central bank starts using discretion to provide marco-prudential oversight, since so much is at stake, every industry lobbyist will be on the phone to well connected personalities in Ottawa to ensure specific outcomes. No central Bank can remain independent under that kind of pressure.

[Bob]

Paper on the post-Keynesian view here:
http://www.levyinstitute.org/publications/a-post-keynesian-view-of-central-bank-independence-policy-targets-and-the-rules-versus-discretion-debate

[Senator-Elect]

I am not part of the target audience for this initiative, but I applaud it nonetheless. It sounds like the Bank wants to become more open, transparent, diverse and, dare I say it, democratic.

If so, I wonder why the Bank does not hold, or hold more, consultations with ordinary Canadians, or at least stakeholders outside the banking and business worlds. More provocatively, if the Bank really wanted to join the 21st century, it would give seats on its board to representatives of labour unions, various demographic groups and civil society organizations. How can the Bank make a valid assessment of the impact of its policy choices on Canadian society without input from a broad cross-section of that society?

You may say that these proposals threaten central bank independence. More accurately, they threaten the monopoly economists and businesspeople have had on running the Bank. There is no such thing as neutral expert advice, and the Bank should acknowledge that fact and begin moving itself toward a more democratic governance model.

[Tel]

Humility: The economy is complicated.

If the central bank ever shows humility and uncertainty it will be interpreted as weakness and inability to cope... thus making the whole exercise of having a central bank kind of pointless. There's a reason they put the man behind the curtain you know.

No central Bank can remain independent under that kind of pressure...

Yeah weeeeelllllll the crime is in getting caught; and these days only the outsiders need worry too much about getting caught. When you hear people talk about "independence" remember, appearance is everything.

We already had three rounds of QE plus a zero interest policy, Fed balance sheet up the whazoo, so you would think all that freshly printed money must have gone somewhere. Did you see where it went? I'm interested in knowing. Price of rare artwork seems to be up, I should have been one of them artists. That's why I got interested in learning economics, so I could polish up on my errrr, artistry.

[JKH]

reach out to the Department of Finance

to explore paradigms for monetary/fiscal policy relationships

institutional monetary policy claustrophobia is no good - the financial crisis should have taught us that

[Avon Barksdale]

Tel, Senator-Elect, JKH

I think you are missing the point. Most economists - most people - see central bank independence as a good thing. Independence builds legitimacy, which is the backbone of any society. In a democracy, political independence can only be achieved with limited powers.

During the financial crisis I am sure that the Bank of Canada wanted a “helicopter drop", simply print money and handed it out. But in our democracy the power to write cheques to people resides with Parliament and for good reason - who gets the money and how much is a deeply political decision. Only elected representatives who will eventually face the voting public have sufficient accountability to make those decisions.

Deep in our Western tradition, we believe in rules, laws, and the rule of law. Independent agencies - like our central bank - to the greatest extent possible should implement these laws and rules. Most importantly, they should not use discretion to satisfy "stakeholders" - that's the role of Parliament. The more an agency follows rules, the more limited its powers, the more independent it can be.

[Nick Rowe]

Scott Sumner responds here.

[Jacques René Giguère]

Nick: Parliament were set up to collect real resources and allocate them. Helicopter money is merely a simple (though powerful) way of inducing people to use unallocated resources.
As long as the populace (and the elites) is uneducated, you're unfortunately right...

[JKH]

Avon Barksdale

I agree with you, although I doubt the Bank of Canada thought much about "helicopter drops" because of the very point you make

I was thinking more of ways of examining the modus operandi behind and the effect of the consolidated term structure of the federal debt - two different institutions are making decisions that affect that

[dlr]

Ideas to research:

(1) Whatever the nominal target, inflation or something else, 2% or 4%, make up for misses. Level targeting is what turns a target into a rule. It is an equilibrium groove sculptor.

(2) Always and only do "whatever it takes." Whatever monetary action the BOC prefers, whether interest rate channels or something else, consider the behavioral implications of restricting communication and intent about policy action to always and everywhere be 'infinitely until our actual forecast of the chosen nominal variable coincides with our target.' Leave any communication about real variables or time periods, if "necessary," to the errata. The policy contingency should always be whatever it takes but not a whit more.

(3) If you are using a policy action that is subject to limitations caused by the marginal convenience yield on base money falling to zero such as positive-only interest rate channeling, consider switching to a back up policy that has a better chance of communicating credibility either always or at those times. One example is buying and selling a passive index of global assets. It needn't be perfect, just mechanically selected, easily communicated and implemented. Most importantly, leave the 'whatever it takes and nothing more' contingency and the nominal target in place.

(4) Ignore financial stability risks entirely. Support the creation of a financial stability institution if desired, as long as that institution has no impact on monetary policy.

[Avon Barksdale]

dlr,

"One example is buying and selling a passive index of global assets." You want the central bank to buying and selling risky assets, manipulating the stock markets. Why?

Manipulating asset prices is an intensely political decision and doing so will destroy the independence of the central bank. The Chinese are learning this the hard way.

[dlr]

Manipulating asset prices is an intensely political decision and doing so will destroy the independence of the central bank. The Chinese are learning this the hard way.

The idea is not to manipulate asset prices, it is to manipulate the domestic price level. The Bank of Canada buying something roughly equivalent to a passive index of global assets isn't going to manipulate asset prices in any meaningful way. And it doesn't have to come with that perception, either, although that's part always part of the communication challenge. The point is to have an action available that might more reliably bolster the credibility of the BOC's communicated reaction function when conventional actions become obviously unconvincing due to the zero bound.