The next research economist advising traders to get onto the MPC should serve gardening leave beforehand

This suggestion was put to me by an old friend, and it seemed right.  To explain:

Jan Vlieghe – who I think is a great hire for the MPC – is shortly to start voting on the MPC, following his appointment to the slot vacated by David Miles.  I’d like to propose that the next similar appointment enforces a protracted period of gardening leave, a period between departing the former private sector employer, and casting the first vote, lasting a few months at least.

Why?  We are used to the idea that those moving from the public to the private sector should serve time like this, so that their knowledge of the Bank of England’s policy deliberations has time to become sufficiently outdated that the future private sector employer is not getting any unfair advantage.

But why the need for a leave period to mark moves in the other direction?

A classic job type – including Jan’s – is for a private company to employ economists to scrutinise central banks, and the data they are watching, to figure out as accurately as possible what they are going to do next.  And then to figure out based on that what a fair price would be for assets whose value is closely related to current and future central bank interest rates.  Like that country’s government bonds.

Over time, such an economist will build up a world view, sharing it with those actually taking risk in the company, getting feedback, probing it, modifying it when it is shown to be in error, and so on.  Those actually taking risk might not share that view [one such Tweeeted at me today something like ‘if I listened to our economists I would be bankrupted’].  But they certainly know it, from hours of grilling.

Part of the process of worldview building is likely to be of the following form ‘if I was in their shoes, this is what I would be doing and thinking’.  In figuring out what the MPC will do, it may help to figure out what the MPC should do.

As Jan, or any future similar MPC hire, casts their early votes, they will be doing so tackling the same challenges that were explained to their former employers, including helping unravel what they thought were misperceptions by the Bank, or emphasising good insights that the other, ongoing, incumbent members had.   This puts the former employer, (in this particular case Brevan Howard), at an advantage, for the period while this information is useful.

If procedures inducting members like the Treasury Committee hearings, or other procedures like the Inflation Report and the Minutes, were immediate and entirely transparent in communicating the new hire’s worldview, then the advantage got by one of your economists being hired as an MPC member will be very short-lived and immaterial.  But such procedures fall sufficiently far short of this to leave room for money to be made.

It goes without saying that Jan is just an example here and the problem is not specific to his hire at all.  It would have applied with the same force to Ben Broadbent, the late David Walton, and probably others.  It was pointed out to me that even those economists who work for large industrial corporates fall foul of this, since those companies have large Treasury operations who would make money by knowing a little better what would happen to interest rates.  So a hypothetical return of Spencer Dale, who went to be Chief Economist at BP, would present the same problem.

So the solution is to enforce a few months of gardening leave, enough time for the new MPC hire’s world view as it was when they left their private sector employer to be sufficiently outdated that their first few votes become no easier for them to predict than for other market participants.

 

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4 Responses to The next research economist advising traders to get onto the MPC should serve gardening leave beforehand

  1. Lyn Eynon says:

    The case for such ‘gardening leave’ is reinforced if you turn this around. As well as the risk of private advantage to the former employer, there is also the risk of contributions to MPC deliberations being distorted by the worldview formed in that private role. As well as some employer-specific elements, this worldview will be strongly influenced by the sector in which the new MPC member recently worked. Someone from finance is likely to see the world differently than, say, an economist who had worked for an employers’ organisation with strong manufacturing representation, or even a trades union.

    So the ‘gardening leave’ period should be used to gain exposure to as many perspectives as possible prior to MPC decision-making.

    • Tony Yates says:

      I don’t agree that that’s a benefit. The experience Jan and his predecessors in similar jobs got in that sector is invaluable, since the effects on interest rates transmit first, and always, through the financial sector. If you want to understand it, it helps to have worked in it. I would subscribe to ‘expertise mix’ rather than perspective mix, and this is to be got by appointing different types of people. Don’t forget these individuals are likely to be late career anyway, so you are not going to change their thinking much with a few months of leave.

  2. am says:

    External appointments do need gardening leave, as you say. But what about appointments from within the BOE. It may be against the constitution for various reasons.

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