Committee structure and its implications for Monetary policy decision-making

We investigate the implications for the setting of interest rates when monetary policy decisions are taken by a committee, in which a subset of members may meet prior to the voting in the committee and therefore has the possibility to reach consensus ex ante to vote unanimously ex post. We allow for different committee sizes, various voting rules and differences in skills among committee members. We find that the size of the committee is much less important in deter- mining the degree of interest rate inertia than the skills of committee members. Moreover, prior interaction of a subgroup only has a minor effect on the setting of interest rates by the committee, provided that members on average are equally skilled and voting takes place using a simple majority rule. If either of those assumptions are relaxed, prior interaction has substantial effects on the setting of interest rates. In addition, prior interaction increases the optimal size of the Committee, ceteris paribus

On the Optimality of Decisions

Most monetary policy committees decide on interest rates using a simple majority voting rule. Given the inherent heterogeneity of committee members, this voting rule is suboptimal in terms of the quality of the interest rate decision, but popular for other (political) reasons. We show that a clustering of committee members into 2 subgroups, as is the case in a hub-and spokes systems of central banks such as the Fed or the ESCB, can eliminate this suboptimality whilst retaining the majority voting rule

Regional Price Adjustment in a Monetary Union: the case of EMU

Using a New-Keynesian framework, we investigate how far the inflationary processes in member states of EMU cause regional price levels to converge. We fail to produce hard evidence of the present existence of such an adjustment mechanism, notwithstanding that inflation in some countries tends to converge towards the euro area level. Overa11, inflation persistence has declined significantly over the years, but there are still marked differences between countries on this score. We conclude that the euro area is not an optimal currency area yet, lending support to the quest for further structura1 reforms in European labour and product markets

The Lucas Critique in Practice: An Empirical Investigation of the Impact of European Monetary Integration on the Term Structure

An empirical investigation of the term structure (the relation of the long interest rate to the short interest rate) showed structural change as the deadline for the euro became closer. Our empirical analysis of the term structures (yield curves) in 12 OECD countries uncovers that econometrically estimated behavioural equations for most EMU countries were stable even in the light of the creation of the euro. This finding would seem to defy the Lucas Critique. However, the significant structural instability found for the euro area's core country Germany suggests that the Lucas Critique is relevant in the analysis of the impact of the creation (and future extensions) of EMU