Ben Broadbent: Monetary and macro-prudential policies - the case for a separation of powers

Speech (via videolink from Bank of England) by Mr Ben Broadbent, Deputy Governor for Monetary Policy of the Bank of England, Reserve Bank of Australia, Sydney, 12 April 2018.

The views expressed in this speech are those of the speaker and not the view of the BIS.

Periodically, public services in Britain are criticised for what is described as a "target culture". The charge is that, because they're asked by politicians to concentrate on the more prominent and observable objectives of the job, public services can pay too little attention to its less visible requirements, even when those are equally important. If you ask doctors to prioritise a reduction in waiting lists they might then spend too little time with individual patients. If they're judged only by exam results there's a risk that schools "teach to the test" and neglect the broader aspects of education.

What these jobs have in common is that they involve multiple objectives, some of which are more easily measured than others. Many jobs are like this and economists have suggested that this can explain why, in the real world, performance-based pay contracts are much less prevalent than one would expect. In general, and certainly if someone's performance can be easily verified, it helps to offer incentives of this sort. But if over-simplified targets sufficiently distort an employee's incentives, because they ignore the less verifiable aspects of a job, it can be better simply to pay a flat wage.