Why tomorrow’s central bankers need to think like MBA students

After an extraordinary series of global supply chain snags caused by the pandemic, the next generation of central bankers is taking a page from the business school play book, learning how the market reacts to bottlenecks and what monetary policy can do to help.

The educational shift, seen recently at a master’s programme in Malaysia for young policy makers, underscores how the flow of goods has become key to understanding the way two years of supply chain snarls helped drive up consumer prices the fastest in decades.

As part of the course, set up by the Asia School of Business with backing from the Massachusetts Institute of Technology, students play the ‘Root Beer Game’, a version of the
decades-old classic in MBA programmes that helps illustrate supply and demand signals and dynamics, from producers down to consumers.

Young officials played alongside students from the business school, allowing them an opportunity to simulate how the flow of goods impacts monetary policy decision making.

“It corresponds to what happens in the real world,” says Vipichbolreach Long, of the National Bank of Cambodia, who played the role of a retailer. “We can see the chaos in the supply chain with manufacturers and wholesalers confused when the signal from downstream was unclear, and what that means for monetary policy transmission,” Long says.

There’s been no shortage of teachable moments on the course as the pandemic forced central banks to unleash trillions of dollars’ worth of unprecedented support for governments, households and companies as the world economy froze.

How that stimulus, which helped drive a surge in demand, collided with supply chain issues surprised policy makers globally, including at the Federal Reserve. Initial predictions by policy makers that price pressures caused by supply shortages would prove transitory have fallen flat.

Move earlier 
Chair Jerome Powell, testifying before Congress recently acknowledged that, in hindsight, if the Fed understood how the pandemic-induced bottle-necks would collide with strong demand “it would have been appropriate to move earlier” in normalising policy.

That’s among lessons policy makers from Asia, as well as Saudi Arabia, Sudan and the Maldives, are learning in the full-time, one-year residential course for a Masters of Central Banking, which includes a six-week programme at MIT. The fee of 365,000 ringgit ($86,700) includes accommodation in Kuala Lumpur and travel to Washington, New York and
Cambridge, Massachusetts.

While flooding their economies with money helped to drive a quick recovery, the monetary policy binge will leave a legacy that future central bankers will be dealing with for years to come. House prices and stock markets have soared through the pandemic, fuelling concerns over widening inequality, and leaving officials with the challenge of raising rates without crashing the recovery.

The exercise comes as policy makers the world over are scrambling to work out what, if anything, central banks can do in response to supply driven inflation. Eli Remolona, who runs the course, says the ‘root beer’ exercise offers lessons on how lag effects work and how hard it can be to predict the way policy impacts the economy.

“We leverage on the pandemic and how central banks have responded,” says Remolona, who formerly was chief Asia-Pacific representative at the Bank for International Settlements and also had a long career at the Federal Reserve Bank of New York.

In another assignment away from their text books, the young officials are given the opportunity to critique press conferences given by the Fed’s Powell and his European Central Bank counterpart, Christine Lagarde, in order to hone their own communication skills. It’s especially important to monitor the likes of the Fed and ECB given their policy moves eventually spill over to emerging market economies, says Arlene Aguinaldo of Bangko Sentral ng Pilipinas.

“It does make us appreciate how difficult it is to communicate well” on monetary policy, she says.

Better equipped 
The curriculum covers topics that include crisis prevention, behavioural finance, cybersecurity, digital currencies and ethics. Advisers to the course span the world of central banking such as Zeti Aziz, former governor of Bank Negara Malaysia, Robert Merton, MIT academic and Nobel Laureate in economics.

Students interviewed for this article, who spoke in a personal capacity and were not representing their central banks, say the programme allows them to hear from world leading economists and former policy makers while at the same time networking with peers from emerging economy central banks.

“We cannot give a guarantee we’ll prevent the next crisis,” says Yi Duan Ho, of Bank Negara Malaysia. “But we are better equipped to go through it.”