Essays on the Making and Implementation of Monetary Policy Decisions

According to the recent book by Professor Alan S. Blinder "The Quiet Revolution. Central Banking Goes Modern", published in 2004, "...one of the hallmarks of the quiet revolution in central banking practice has apparently been a movement toward making decisions by committee, whereas previously the dictatorial central bank governor was more the norm..." (p. 35). The transition to collective decision making requires that monetary policy should be analyzed in a number of additional dimensions. As interest rate decisions are no longer taken by a single individual, a number of issues arise, related for example to an efficient aggregation of diverse preferences of individual decision makers, their beliefs about models of the economy and its likely future development. These issues are addressed in the first part of this book. In the second part, we turn to investigating another institutional aspect of monetary policy making: central bank control of short-term interest rates. Building on the ?new view? on monetary policy implementation, we investigate the optimal mix of monetary policy instruments, designed to efficiently implement collective policy decisions

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

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 determining 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 these assumptions are relaxed, prior interaction has substantial effects on the setting of interest rates.monetary policy; interest rates