Central banker pay for performance

Nick Rowe had a recent post suggesting that we might want to consider tying the pay of employees at the Bank of Canada to their performance.  He noted that the BOC’s most important objective is 2% inflation.  But how do we compensate each employee on their contribution to meeting that goal?  After all, there is only one monetary policy, toward which each employee contributes.  Here’s how:

1.  Each member of the Canadian monetary board votes on a policy setting for the monetary instrument (short term rate or monetary base.)  They are told to vote for the instrument setting that they believe is most likely to lead to 2% inflation.   The BOC counts the votes sets the monetary instrument at the median vote.  A year later all those who were “right” get paid a $1000 bonus.  All those who were wrong get $1000 deducted from their paycheck.  The votes occur once a month.  Being “right” means voting for a more contractionary than average instrument setting if inflation overshot the target, and vice versa.  Thus if you voted for a 4.5% policy rate, but the median vote was 3.5%, your vote was more contractionary that the median.  In that case are considered right if actual inflation exceeds 2%, and wrong if actual inflation falls short of 2%.  (At the zero bound you’d vote on a monetary base setting.)

2.  Why stop here?  Let’s open up the committee to all 6.7 billion humans.  One man, one vote.  Make participation voluntary.  And wouldn’t one dollar, one vote be more effective at getting the optimal instrument setting?  If you are still with me we have arrived at my 2006 Contributions to Macroeconomics paper.

3.  Why not adopt the policy in the US as well?  And how about switching from a 2% inflation target to a 4% NGDP growth target?  Now we have arrived at my 1989 Bulletin of Economic Research paper.

That’s right; Nick is proposing CPI futures targeting.  At least I hope he is.