Early careers

Paul Conway: So thanks for coming along today. This is the seventh university I've been to in the last 10 days on tour, which has been great. I've really enjoyed it, and two missions for each place. One is to connect with you guys, students, and tout the Reserve Bank as a great place to work, which is easy, because it is. To talk a bit about that and also to connect with academics and just kind of say we've got a research agenda there. We're sort of open for business. Just sort of looking to learn what's going on around the academic community in the economic space around the country and looking for collaboration opportunities. So yeah, as you can see from reading out my little bio, I grew up in Invercargill, in the south of the South Island, so Queenstown Lakes District was sort of my playground as a kid.

I did undergrad at Otago in the eighties. Then I had five years of wandering the world with a backpack on before I decided to get serious about economics, and then I came back and did a masters here when it was up the hill in Kelburn. That must have been... Well, I was in my kind of mid-twenties then, and then I got a job at the Reserve Bank straight after that. I went straight into the kind of modelling/research team, and I spent a couple of... Oh, maybe three years doing that. So I think technically, I wasn't a grad because grads turn up and get rotated across a few different spots in the organisation. We can talk about that towards the end. So I was just strictly modelling and research. Then I went to Westpac for a couple of years just to see what that would be like. Then I went to the OECD. I got lucky enough to score a job at the OECD working on regulation, competition, and productivity, so productivity became my thing. I'm more of a productivity economist than a monetary policy economist, just in terms of my experience over the last 20 years or so. Then I turned up at the New Zealand Productivity Commission, because I don't know if you've seen Krugman and all that saying, "Once you start thinking about productivity, it's very hard to think about anything else." So that sort of long run, structural performance of the economy, whereas monetary policy, we're more about sort of controlling the cycle, the business cycle around that long run trend and sort of keeping it as compact as possible, so that sort of maps into the inflation space.

But I thought what would be useful, because I remember sitting in your space going, "What is economics? What do they do? What does an economist do?" So I thought we could start just by sort of talking about a day in the life of an economist. Oops. Yeah, these economists. Well, me, really. So there's four photos, all with me in them. I didn't make this presentation by the way, because I'd put

other people on it. Far more photogenic people than me, but just to give you a sense of what we do, so obviously we set interest rates, monetary policy's a huge part of what we do at Te Pūtea Matua, the Reserve Bank of New Zealand.

So once a quarter we have a full monetary policy round and we write a report, quarter monetary policy statement, which sort of justifies, it's our sort of read on where the economy's at. We're just going into one of those weeks next week. And then that takes actually about nine days. It's called a forecast week. It takes about nine days, and at the end of that period, we publicise the decision, what we've decided to do to the official cash rate. Whether it's put it up by 50 basis points, or 25 basis points, or keep it on hold or whatever.

So this picture here, top left, is we have a press conference after that, that comms people put together for us, so you've got Adrian Orr who leads that sort of talking to the media, and then you've got me and Karen Silk, my boss, and I think that's Adam Richardson, when he was on the monetary policy committee. So this MPC, it's made up of seven people, so there's four internal reserve bankers, there's the governor, there's Karen, and there's me, and there's a guy, Christian Hawkesbury, who's the deputy governor of the Reserve Bank.

So that's a big set piece that we do every three months, and then the day after that we'll go to parliament. We'll turn up to the Finance and Expenditure Committee, which we take very, very seriously, because it's sort of our democratic accountability to go and sort of... and the politicians get to run their ruler over what we've been up to, where we're seeing the economy, the decisions that we've made. So that typically happens on the Thursday after that. So that's a big week in the life of this particular economist.

This here is, I was at a University of Waikato, macroeconomic forum, so Adrian made a keynote speech and I was on a panel essentially talking about monetary policy over the previous five years. We'd written a report on that, so looking at how monetary policy was conducted over COVID and all of that. There's a lot of interesting things for us to learn from that period, and I was part of this panel with... I don't know if you know Cameron Bagrie, and that's Frank Scrimgeour, I think, from Waikato. Just talking about what we'd learned from that period and what we need to do to learn from it and get better. So Te Pūtea Matua, it's very much a learning institution. It's all about having a growth mindset around these issues.

Now this one here is... Another big part of my job is comms, and it's just sort of trying to lift the quality of the conversation, but we also do this thing where we reach out to schools to try and encourage people to become economists, because it's such a fascinating job, particularly at the moment. So we have this monetary policy challenge, and as part of that, a few of us will get together, will have a webinar live for an hour that gets beamed into economics classes around the country, and it's obviously on YouTube so people can come back to it later. Just sort of kicking it around. Where the economy's at, how it is for us being economists, and the idea with that is that we ask groups of school children to make a little video telling us, if you sat on the monetary policy committee, what would you be doing with interest rates at the current time? So some of you... did anyone get exposed to that at school?

That's a no. Well, a lot of people did or do. I think we took a holiday on that over COVID actually, so it had a few years out, but we've got a few grads there at work who came through that. So anyway, that's a lot of fun.

Now this one here is just me making a video about something. I can't remember what that was, but again, on that theme of comms, every time we put out a monetary policy statement, we'll make a little video about it. We'll sort of talk to bank economists. We try to make it as public as possible. Every time we put out a bit of research, whoever wrote the research will get up. Zoe records that, and just making a little snippet that we sort of put through social media explaining what it is that we've done. Either in the interest rate space or in terms of the research. Again, just trying to lift the quality of the conversation.

So that's a kind of snippet of what I get up to as an economist. Is there any questions about any of that? Otherwise, I'm going to ask some other reserve bankers to talk about their life and work. Yeah?

Speaker 2: You've mentioned a lot about this big quarterly statement, so I guess I'm going to ask the pretty simple question of what do you do the rest of the time? Is it all focused around that or is there kind of stuff you do in between?

Paul Conway: Yeah, yep. So I should have mentioned, as well as those quarterly statements, we do... And they're monetary policy statements, but in between them, every six weeks we do a monetary policy review, which isn't as involved. We don't run the ruler as kind of closely over the economy, but we still have a good look at it, and that's another opportunity for us to change interest rates. So it's not every quarterly, it's every six weeks we're out there doing monetary policy. In terms of what we do the rest of the time. Doing that is quite a full on thing, so it's not like... We don't just sit around and talk. We try and bring a lot of research to the table, so as well as that forecasting, monetary policy, projections kind of area of activity in the department, we've also got a really strong research effort going into understanding...

Gael's the manager of that part of the economics department, so really trying to understand what's going on in the New Zealand economy, because I would say there's no other economy like the New Zealand economy. It's a tricky little economy to understand and to get your head around, and the essential difference between us and other economies is what we call economic geography. So the fact of being so far away from large global markets, the fact of being so small in terms of population, but reasonably large in terms of a landmass. So we're sort of sparsely populated across islands with mountains. It's a challenging sort of geography, and that economic geography, it sort of affects our economy in lots of different ways, and understanding that has been challenging, I think, for New Zealand economists. So to try and push our understanding on where the economy's at, we've got quite a research agenda there and we're trying to build collaborations with academics, because sort of stronger together.

So there's a lot of that going on. There's a lot of... I'm also the director of economics, so a lot of running the economics department, although I'm trying to outsource a bunch of that. A lot of comms, a lot of... I travel quite a bit since borders have reopened up, just... We all do, going to conferences, just making sure our knowledge is right at the forefront, because if we're doing the right research, if we're engaging with the right networks globally, we'll make better monetary policy decisions. So yeah, it's a reasonably full experience. Certainly being the chief economist, and I'm sure these guys would say everyone's quite productive and happily employed at the bank.

Yeah, it's interesting, because Zealand's a small country, but it's still... We have the same sort of range of economic issues as a larger country, so our central bank is quite small compared to other central banks, but we've still got a heap of work to do across all of these issues, which is kind of a... Grads, these guys can talk about it in a minute, but when you come to the Reserve Bank, it's not something we do just to be nice to grads. You are inserted into the matrix. You are put to work, you will be gainfully employed from day one, and within a few weeks or months, you will be presenting in front of the monetary policy committee, with appropriate support around you, so it's a real place that you can have impact.

I think that's a function of the New Zealand economy, the size that we are. The same range of issues that say the Canadian Central Bank deals with or whoever, but just with a smaller number of people, so it's less about being really knowing everything about a small space and it's more about having a really good grasp across the whole economy.

Speaker 3: When you're producing those reports, obviously you look at unemployment and inflation in the economy, but what other key measures would you say you look at when you're trying to produce OCR rate?

Paul Conway: Well, all of them. We look at every piece of economic data that comes out of Stats NZ. It's kind of challenging in the macro data space, a lot of it is quite lagged, so it's kind of driving the car, looking in the rearview mirror. We just had labour market data out for Q1. We don't have GDP for the first quarter of this year yet. We don't have monthly CPI, it's only quarterly, so the data, we make the most of it, obviously, and we're right across all of it. I think there's a sort of... Well there is a push within the department to get across alternative data sources, so a lot of private businesses produce data that gives us a good read on the economy. There's things like freight movements across the country, electricity consumption.

Now, we're not doing it yet, but there's people out there measuring GDP from satellite data, looking at light intensity, that kind of thing. Like anything that we can get our hands on to give us a view of what's happening in the economy. Ideally today, not a few months ago, especially at the moment, because the economy, it's been pushed around by COVID. We've been affected by the war in Ukraine in various ways. We've had flooding, we've had cyclones, so it's been a very volatile period, so the economy is changing all the time and keeping up on that, just using lagged data out of Stats NZ would leave a few holes.

Speaker 3: What is the time delay? Is it about a couple of months, or what?

Paul Conway: It depends on the data. I think inflation comes first, for a quarter, then it's labour market, and then GDP is last, but there's also opinion surveys, there's house prices, so it really just depends on what the data is, and we're across all of it. We're doing work on now casting GDP, using current indicators to get an idea on where GDP is today. There's work going on, can we scrape websites to get an idea of what inflation's doing, more sort of real time, and you might not be able to do it for the whole consumption basket, but if you can do it for a bit of, it's good. It's better. So yeah. Good, on a roll. I love it.

Speaker 4: And I guess this is a specific question, but how much weight in your... does market expectations play in your decisions?

Paul Conway: Yeah, expectations are fundamental, so the thing about inflation, if we believe inflation is going to be 5% for the next two years say, that conditions our behaviour, so you might push a bit harder for a pay rise if you're a worker, or if you're a business, you might push a bit harder in terms of your pricing in the expectation of future inflation. So inflation expectations can become self-fulfilling, so we spend a lot of time looking. Inflation expectations are very key, and there's a couple of different ways you can get it. One, is from surveys, and we're putting significant effort into that currently, but you can also get it through market pricing of bonds essentially. So yes, we look at that.

I should say financial markets bounce around quite a lot, so there's a sort of an old joke that financial markets have predicted two out of the last... Oh no, seven out of the last three recessions kind of thing, so they're all over the place depending on what's going on. There is signal in that, but there's also a bit of noise from a core macro perspective, so we put a lot of effort into how do you identify signal and strip out the noise.

We don't just give financial markets what they want. We're not afraid to do something different than what's widely expected if we come to the view that that's what's required. We've got a really strong team of economists there. It's probably the biggest concentration of economists in New Zealand, I would think, so, yeah.

Speaker 5: Speaking of that kind of getting rid of the noise kind of thing.

Paul Conway: Yeah.

Speaker 5: There's a lot of complaining about... Headline inflation gets thrown around by oil prices or whatever.

Paul Conway: Yeah, yeah.

Speaker 5: So what do you think the best measure of core inflation is?

Paul Conway: Let's put some up. I don't have a personal favourite. There's a bunch of core inflation measures. So this is headline inflation, so it's dropped from 7.2% to 6.7% in the third quarter of this year, which is great to... "It looks like the turning points behind us. Let's see what happens," but as you can see, a lot of those core inflations measures are still... There's still persistence there. In terms of our favourite, I think maybe Gail could talk to this, but we've got a weighted median where we trim the ends off the more volatile bits of inflation. We run a factor model, a sectoral factor model, and a trimmed mean, and we've got other ones bouncing around the department. So yeah, as I said, we look at all of them. I guess we do have a favourite, do we? Do you?

Gael Price: I don't think we do at the moment.

Speaker 7: No.

Gael Price: We found in the past that... Hi. Okay.

Speaker 7: Okay.

Gael Price: I think Paul was asking me this question, because I helped to develop some of these models a long time ago. In the past we found that if we say we have a favourite, then people tend to then start ignoring the other models. People in our audiences who really we need to be speaking to them in kind of a common language. They need to understand what we mean when we say things like core inflation, and we see value in all of the measures, so they're all different, right?

Paul Conway: Yeah.

Gael Price: There've all got pros and cons, but we genuinely look at all of them, so if our audiences are paying attention to just one, to the exclusion of all the others, that's not been helpful for us. We really do want to talk about the whole set.

So the short answer is the trim mean and weighted median measures are really good, because they move quickly, so they work from the actual CPI dataset, and when that turns, then those measures turn immediately, so they're good at showing you turning points. The two models shown on the screen, the sectoral factor model and the other factor model are terrible at picking turning points, but they're really great at getting rid of noise, so if you want something that kind of shows you the underlying signal, you look at the models, but around turning points, they're incredibly slow moving, so they don't really tell you whether you've reached the peak or not.

Paul Conway: If you look at... How many goods are there in the CPI basket?

Gael Price: There's like 112 different classes and [inaudible 00:19:23] items [inaudible 00:19:23].

Paul Conway: Yeah, classes, and then there'll be items below that, so if you look at price increases across all of those items, there's good stories in that. Averages, or aggregates, or indices, they kind of hide as much as they reveal.

So just to give you an example of that, this green line is the distribution of changes across each of those items in the CPI basket, so you can see it's bell curve kind of thing, and then you can see in 2021, there were a number of goods that had strong price increases. So inflation in 2021 was sort of driven by big increases in the prices of a few specific products, and then if you roll forward to 2022, that's still there a bit, but the whole kind of distribution has moved to the right, so it was more about small increases in a wide range of items in that CPI basket.

So again, you wouldn't see that if you're just looking at the aggregate or at a particular measure of core inflation, so we're all over everything. We use everything. There are no shortcuts in economics, which is kind of what Gail's saying. If we told somebody this one's the most important, then they'd all be just thinking, "Okay, I can tell what they're going to do just by looking at this series," and it's not that straightforward. It's not that mechanical sort of thing.

All right. Are there any other questions?

Speaker 8: What kind of work does the bank do in the wellbeing area?

Paul Conway: For people that work there or in general?

Speaker 8: Something like how the Treasury has the system of wellbeing focused as a bank also.

Paul Conway: Our kind of fundamental mandate is around improving... What is it? Prosperity and wellbeing, so it's definitely there. I think we're more sort of... It's macroeconomics, so we sort of do that. We think our best contribution to doing that is by containing inflation and supporting maximum sustainable employment, so we're not as on top of wellbeing as what you'd see at the Treasury where they've got fairly elaborate wellbeing frameworks, and dashboards, and all of that. We understand all of that, and we're sort of thinking about where our role intersects with that broader perspective on wellbeing.

Personally, I'm really... Economics has always been about wellbeing, but then they've built measures of GDP in the fifties and people kind of went, "Oh yeah, so it was actually just about income," and it isn't. Wellbeing and income are correlated to a certain point, but then you get above a certain income and that correlation breaks down, so wellbeing is more kind of complex than just looking at income. So yeah, we're right alongside Treasury in that sort of wellbeing focus, but we're also quite clear about what our role is in terms of promoting wellbeing in that broader framework. Our mandate is quite specific.

They talk about monetary policy, it's a blunt tool, it's a powerful tool and it works in particular ways. So yes, we're into the wellbeing stuff, less so than Treasury. We're also into the distributional effects of monetary policy, and again, it's not something that we can directly influence, because it is a blunt tool, but if we understand how the monetary policy works in the distributional space, that's just good to know, and we sort of say, fiscal policy can be a bit more sort of targeted at particular demographics as opposed to monetary policy, but yeah, it's a good question. I'm really happy that, globally, the whole profession has moved to this wellbeing focus.

It's actually one thing I'm really... I think we're a little behind the times here as far as an economics community goes in New Zealand, but sort of globally, the profession, it's changing and flexing all the time. It's less about a rational being that's optimising every aspect of what they do, even from before they're born and after they die. That kind of rational... I mean, there's still a basis there in our modelling, but to my mind, economics has become far more about the real world, so it's kind of about using big data to understand the communities in which we live and how those communities work together.

And as I've said, I like the wellbeing focus. I think the policy space has really changed globally as well. People talking about missions, and obviously ecological economics, that donate economics kind of idea. Economics, it's a relatively new discipline, so it is evolving and it is kind of morphing through time. There's no kind of, this is how you do it. It's a framework for thinking about a whole range of different issues, including wellbeing.

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