Academic journal article Contemporary Economic Policy

Monetary Policy Committees: Meetings and Outcomes

Academic journal article Contemporary Economic Policy

Monetary Policy Committees: Meetings and Outcomes

Article excerpt

I. INTRODUCTION

Central banking has undergone a tremendous transformation over the last 20 yr (see Blinder 1998, 2004). A prominent example is the collective character of policy decision making. According to Fry et al. (2000), in the late 1990s 79 out of 88 surveyed central banks had committees to make policy decisions. Central banking by committee by now has become the rule rather than the exception. Whether or not this results in better monetary policy however is not clear. Theory suggests that collective decision making consistent with optimal individual behavior requires MPC members to condition their votes on those of their colleagues. And, as noted by the political science literature, the superiority of committee decision making can depend on for example the voting rule used, see for example Nitzan and Paroush (1985). The early economic literature on collective decision making in a monetary policy context noted that preferences and strategic considerations between committee members might adversely affect the quality of collective monetary policy outcomes (see, e.g., Waller, 1989, 1992; Von Hagen and Suppel, 1994; Gruner, 1999; Hefeker, 2003; and Sibert, 2003). More recently, Blinder (2004, 2007) takes a more benign view, by arguing that collective monetary policy decision making should result in better outcomes, because of the pooling of information, models, and expertise.

This paper adds to the rapidly growing literature on Monetary Policy Committee (MPC) decision making by starting from the stylized fact that in reality MPCs around the world operate differently and are organized differently, see Fry et al. (2000), Morris and Lybek (2004), or Maier (2007). These differences span many dimensions, such as size, composition of membership, decision-making rules and the way the meeting is structured. Some of these differences have been shown to have an impact on the behavior of MPC members. Gerlach-Kristen (2003), for example, showed that different types of members of the Monetary Policy Committee of the Bank of England (internal vs. external members) differ in the frequency and the duration of dissents, and in preferences to dissent for lower or higher policy rates. Bhattacharjee and Holly (2005), Spencer (2006), and Groth and Wheeler (2008), among others, have shown that these dissents can be explained by varying sensitivities to changes in macroeconomic situation, to deviations of inflation forecasts from the target, and to differences in the way individual members assimilate information supplied to them (different "mind-sets"). Chappell et al. (2005) report results analogous to Gerlach-Kristen (2003) for the United States. Further, Chappell et al. (2004, 2005, 2007a, 2007b) have shown the effects of a strong chairman on the Federal Open Market Committee (FOMC) members' interest rate proposals. Meade and Sheets (2005) documented the effects of regional background on individual FOMC members' interest rate proposals. Finally, Meade and Stasavage (2008) showed the effects of a publication of verbatim transcripts of the FOMC meetings on the debate among the members.

Our contribution is that we investigate analytically whether an observed difference between MPCs of influential central banks (of the United States and United Kingdom), that is, the origin and timing of the interest rate proposal, has a bearing on the policy outcome. (1) The stylized MPC meeting begins with a presentation of recent economic and financial developments by central bank staff, updating the reports that were disseminated to all members before the meeting. Then members discuss the economic outlook and, subsequently, the appropriate policy stance. Finally, a policy proposal is put to a vote. The proposal can be prepared a priori, which is the case in the Federal Open Market Committee, or can be made by the chairman to reflect the majority of views presented in the meeting, which seems to be the case at the Monetary Policy Committee of the Bank of England. …

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