The return of the generalist central banker?

If you were following public commentary surrounding the Reserve Bank of India in recent years one would have been excused for coming away with some or all of the following views.

1. Monetary policy is an exercise in arcane mathematical models and complicated econometrics - Taylor Rule, DSGE models, potential output etc. Monetary policy making is therefore an exercise in technocracy.

2. It is therefore best left to expert economists, more specifically monetary macroeconomists. And as a corollary, everyone else knows little about the arcane world of central banking. Generalist bureaucrats and politicians in general are the least preferred options.

3. In fact, even among the economists, we need "monetary policy hawks", purist economists who follow the textbook on targeting inflation and maintaining price stability. 

4. These experts are exceptional and deeply committed individuals, who can do no wrong technically and whose intentions are always right. It is the RBI and India's great good fortune to have these exceptional individuals. And as the counterpoint, government (and the Ministry of Finance) is always the exact opposite. 

5. Worse still, the government is always trying all possible means to exercise control over the central bank, and the experts from outside are valiantly trying their best to safeguard the central bank's independence.  

6. Furthermore, even as the RBI is trying to maintain macroeconomic stability and foster economic growth, the government is doing everything to destabilise growth with fiscal irresponsibility and not biting the bullet on big bang reforms. 

It is in this backdrop that three exhibits assume significance.

First, Daniel Moss in Bloomberg, is effusive in his praise for the current RBI Governor,

India is becoming the gold standard for monetary policy in Asia, if not the world. While global markets are giddy from hints that the Federal Reserve may cut interest rates, India’s central bank has been easing since February. Just as important, the Reserve Bank of India has been very consistent in its message: Borrowing costs need to come down to juice growth... The RBI's approach is correct. There’s no point targeting inflation if growth is waning and the very thing you’re aiming at is dormant... So give Governor Shaktikanta Das his due. The RBI's rate cut in February was risky – few economists anticipated it – but appropriate. The signaling power was immense. Officials followed that up with another reduction in April. The outlook has only deteriorated since then. Central banks in Malaysia, the Philippines, Australia and New Zealand concurred. India was, and still is, ahead of the curve – all the more remarkable given emerging markets tend to follow the Fed. Even the chaos surrounding the withdrawal of most banknotes from circulation in 2016 has slipped from the foreground... Das was drawn from the ranks of India’s bureaucracy rather than the central bank. It was clear the government didn't want any freelancing... Given Das’s success in monetary-policy development and execution, India would do well to keep him around.

This is a delicious irony. The exit of the previous Governor was not accompanied by the expected "wrath of the markets", flight of the confidence fairy, and mayhem on the financial markets. It is a different matter that ideologically captured commentators never learn. The premature exit of the present Deputy Governor has been met by similar prophecies of doom and question marks about central bank independence. This too will pass and the morning after the night before will remain no different.

Now comes the surprising announcement of another career politician/bureaucrat Christine Lagarde to be the President of European Central Bank, replacing economist Mario Draghi,

European leaders have agreed a deal to fill the EU’s most important jobs, backing Christine Lagarde to lead the European Central Bank and Ursula von der Leyen to be president of the European Commission... The selection of Ms Lagarde, not an economist or one of the front-runners to replace Mario Draghi, was unexpected. She has become a superstar of international finance after eight years as head of the IMF and four as French finance minister. But she has no direct experience of monetary policy which could prove a disadvantage as the ECB searches for new ways to combat weak inflation and boost the eurozone economy.

They join Haruhiko Kuroda, a bureaucrat, who heads the Bank of Japan and Jerome Powell, a lawyer, who heads the Federal Reserve. The BoJ under Kuroda has been acclaimed for being the trendsetter for the extraordinary monetary accommodation by central banks of developed countries by way of quantitative easing and negative interest rate. With Ms Lagarde's appointment, Mark Carney of Bank of England and Yi Gang at People's Bank of China remain the only economist Governors of the major central banks. 

I had blogged earlier highlighting the misguided nature of the debate on central bank independence.

Finally, in this context of fascination with experts, it is useful to quote Andres Velasco,

Conflicting motivations are probably a more important reason why citizens increasingly distrust experts. There is a misconception at work. Policy wonks think of themselves as unbiased purveyors of high-quality, evidence-based advice. Informed citizens reasonably fear that the wonk in question may be in thrall to a particular ideology or methodology; that the advice may be politically motivated; or that advisers may tailor their counsel to their own career concerns (how to get that plum job on Wall Street after leaving government, for example)... So, as with so many political issues nowadays, it comes down to a matter of identity: can voters identify with the expert or the politician whom the expert advises? Can voters sense that they belong to the same tribe and uphold the same values? Typically, the answer is no. And there lies the root of the problem. Policy gurus and politicians probably spend too much time with others like them – top civil servants, high-flying journalists, successful businesspeople – and too little time with ordinary voters. This undoubtedly shapes their worldview. As a Spanish-language saying goes “Tell me who your friends are and I’ll tell you who you are.” So how can experts regain citizens’ trust? The answer is paradoxical: by becoming intellectually more modest, less beholden to the rarified ways of the ivory tower and the lecture hall, and likelier to listen to people who do not have a PhD. If they could become “humble, competent people on a level with dentists,” as John Maynard Keynes once suggested, then there is at least a chance that voters will identify with the nerdy pointy-heads and find them trustworthy.

And this summary of the findings of Philipp Tetlock is instructive,

Experts who confidently believe in only one approach and view the world through a single conceptual lens are particularly bad at forecasting. By contrast, experts who recognize how little they know and therefore proceed by trial and error, constantly adapting their forecasts, are less likely to get it all wrong.

Who are the second type of experts referred to above? Politician or bureaucrat or anyone who is experienced in dealing with the real world and its messiness. There is nothing about being a central bank Governor that requires him/her to be an expert in macroeconomics. 

Apart from understanding the dynamics of the economy and the relevance of monetary policy, the central bank Governor should have the ability to listen and consolidate opinions from different stakeholders, especially democratically elected governments, distil them, and be able to exercise good practical judgement. The same ability to exercise good judgement is invaluable as a regulator. Prudence, arising from depth of experience. Besides, he/she should also be able to administer a large organisation like the RBI. The reality is that these unsexy and less discussed traits matter much more than pure wonkery.

I am inclined to think that recent experiences may have conclusively sealed one thing for the RBI. For the foreseeable future, it is very difficult to see any government choosing an expert as the RBI Governor. And that may not be a bad thing.