Open letter: the RBA review needs to be completely independent of government

This is the text of an open letter from 12 leading economists, sent on Sunday:

To the Treasurer, the Hon. Dr Jim Chalmers, MP

Ahead of the 2022 election, both major parties committed to conducting an independent review of the Reserve Bank of Australia (RBA).

This bipartisanship was welcome and befitted the independent nature of the conduct of monetary policy, which conditional on the RBA’s mandate ought to be beyond the scope of day-to-day politics.

Now that the election outcome is known, it falls to the new government – and, principally, to you as Treasurer – to establish the terms of reference and logistics for the review process.

It is critical that a review be conducted but the devil is in the detail – poorly crafted terms of reference have the potential to undermine the efficacy of the review and therefore the future conduct of monetary policy.

The review presents a once-in-a-generation opportunity.

The conduct of monetary policy is critical to the functioning of the Australian economy and through it the welfare of every Australian.

Recent decades have seen the Australian economy buffeted by unprecedented external shocks, which have necessitated rapid adaptation of both monetary and fiscal policy. Meanwhile economies across the world have experienced a long-run secular decline in economic growth and real interest rates.

Now is the time for a wide-ranging, independent review of our monetary policy framework and our monetary authority.

With that in mind, it is our assessment that the review should:

• be independent, both of the RBA and government

• be headed by an internationally recognised foreign expert

• be wide-ranging, encompassing the Reserve Bank Act, the Statement on the Conduct of Monetary Policy, and the RBA as an institution including its responsibilities, its structure and culture, the composition and appointment of its board, and the ways in which it communicates with the public

• be concerned both with past performance and how well the RBA is placed to handle future challenges

• explicitly consider the interaction between fiscal and monetary policy.

Full independence is crucial if the review is to make the most of this unique opportunity. No institution can be expected to independently or credibly review itself. A foreign perspective would bring valuable external scrutiny to the process and enable a benchmarking of the RBA against its overseas counterparts.

The review should not be seen as a performance appraisal of a particular regime or individual—rather, it speaks to the performance of the fundamental institutions governing the decision-making process.

It is common for reviews of central banks to be led by foreign experts.

Examples include:

• the RBNZ review by Lars Svensson in 2001

• reviews of the Bank of England by Donald Kohn in 2000, David Stockton in 2012, and David Warsh in 2014

• reviews of the Riksbank by Francesco Giavazzi and Frederic Mishkin in 2006, by Charles Goodhart and Jean-Charles Rochet in 2011, by Marvin Goodfriend and Mervyn King in 2016, and by Karnit Flug and Patrick Honohan in 2022

• the review of the Bank for International Settlements by Franklin Allen, Charles Bean, and Jose De Gregorio in 2016.

We are energised by the prospect of a review and optimistic for what it may achieve. Australia is counting on it.

Yours Sincerely,

Begoña Dominguez, Professor of Economics, The University of Queensland

Chris Edmond, Professor of Economics, The University of Melbourne

Saul Eslake, Corinna Advisory and Vice-Chancellor’s Fellow, The University of Tasmania

Renée Fry-McKibbin, Professor and Interim Director, Crawford School of Public Policy

Steven Hamilton, Assistant Professor of Economics, The George Washington University

Richard Holden, Professor of Economics, UNSW Business School

Warwick McKibbin, Distinguished Professor, Crawford School of Public Policy

John Quiggin, Professor of Economics, The University of Queensland

Kristle Romero Cortés, Associate Professor of Banking and Finance, UNSW

Chris Richardson, Partner, Deloitte Access Economics

Peter Tulip, Chief Economist, Centre for Independent Studies

Danielle Wood, CEO, Grattan Institute

Warwick McKibbin is a former member of the Reserve Bank board. Peter Tulip is a former head of research at the Reserve Bank.