Deliberation and Learning in Monetary Policy Committees

Article excerpt

I. INTRODUCTION

Recent theoretical and experimental work on the monetary policy decision process supports the argument that committees may make better policy decisions than individuals (e.g., Blinder 2007; Blinder and Morgan 2005; Gerlach-Kristen 2006; Lombardelli, Proudman, and Talbot 2005). Blinder (2004, 38-39) offers four reasons why monetary policy committees (MPCs) might make better choices than individuals. First, when members have different preferences, diversification avoids extreme outcomes. Second, even if members have similar preferences, they might use different models to reach their conclusions. Third, members might use different forecasts or forecasting techniques. Finally, individuals might use different modes of reasoning--or "heuristics"--to approach problems. The last three reasons in

Blinder's list suggest that members bring distinct perspectives or information to a committee meeting. Deliberation in the committee meeting requires members to confront their differences and could result in both learning and better policy decisions.

Former Bank of England MPC member Richard Lambert (2005) and former Federal Reserve Bank of Boston President Cathy Minehan (2006) have pointed to the importance of deliberation in MPC meetings. Particularly revealing are Minehan's (2006) comments about her experience on the Federal Open Market Committee (FOMC):

   One highly important element in dealing with uncertainty is the
   strength of the committee itself In that regard, it is perhaps
   fashionable to deride committee decision making in general as
   bureaucratic and cumbersome. My view is that in situations where
   there are many possible philosophical approaches and a lot at
   stake, a committee helps its members to both see all aspects of the
   issue, and weigh the risks and costs of a particular decision. As
   with other vital institutions, like the Supreme Court, there is
   value to a committee decision on policy versus one taken by a
   single executive.

The importance of deliberation in various decision-making contexts has also been addressed in political science. Austen-Smith and Feddersen (2006) contribute to the literature on jury deliberation by offering a theoretical analysis of how different voting rules shape voters' incentives to share information prior to a vote being taken. Barabas (2004) finds evidence that deliberation is an effective way to disseminate information and shape opinions about public policy issues. U.S. Supreme Court Justice Stephen Breyer has explained how deliberation matters in Supreme Court conferences (cited in Brafman and Brafman 2009, Kindle Location 1764):

"If someone is going to write a dissent ... they have a point, they have some kind of point they're trying to make. Quite often the opinion [of the majority] is changed somewhat in response to comments and opinions [of the dissenters]. Occasionally--maybe once or twice a year--the whole Court shifts."

Even when dissenters do not have enough votes to change the Court's opinion, they still affect the process. "It makes the other person take account of the point. They have to answer it or they have to take it into account," Breyer said.

In the case of the FOMC, Bailey and Schonhardt-Bailey (2008) use a full-text content analysis of the 1979 and 1980 FOMC transcripts to study the importance of deliberation in the decision to shift to anti-inflationary policy under Chairman Paul Volcker. They conclude that "deliberation in the FOMC did indeed 'matter' both in 1979 and 1980" (p. 404) as Volcker led his colleagues to adopt a new operating procedure and maintain a more restrictive monetary policy stance. Bailey and Schonhardt-Bailey (2009) extend their analysis to the 1979-1999 period and find that the role of deliberation declined from the Volcker era to the Greenspan era; Woolley and Gardner (2009) concur with this result. Even in light of previous theoretical and empirical work on deliberation, though, Bailey and Schonhardt-Bailey (2009, 22) nevertheless argue that "too little attention has been given to understanding the process of deliberation in policymaking and how this yields outcomes (decisions) and the quality of those outcomes. …