THE VALUE OF DIVERSE PERSONALITIES IN MONETARY POLICY-MAKING

Having a diverse group of decision-makers on the Bank of England’s monetary policy committee (MPC) leads to better policy-making, according to research by Arnab Bhattacharjee and Sean Holly, to bepresented at the Royal Economic Society’s 2012 annual conference.

Despite claims that a majority voting committee would have the benefit of taking personalities out of interest rate decision-making, their study finds that personalities are important within the MPC. What’s more, diverse personalities are likely to promote better monetary policy.

The study looks at the different members of the MPC and the effect they have on the eventual monthly decisions. It finds that externally appointed members tend to be less worried about inflation and more worried about job losses and threats to growth.

Different MPC members also react differently to uncertainty in the macroeconomic environment, to unemployment and to the asset markets. The authors argue that such diversity ‘is important for the conduct of good monetary policy’.Theyconclude:

‘It is too simplistic to argue that the monetary policy committee takes personalities out of the decision-making process.

‘Heterogeneity across committee members has the advantage of providing opportunities to consider and debate a wide range of possible policy responses to current and expected future macroeconomic conditions.’

More…

Within the Bank of England’s MPC, policy-makers often disagree on the most appropriate policy response at a given point of time. This heterogeneity is an important feature of voting by MPC members. This research identifies such diversity in views as arising from three different sources.

First, MPC members differ in their degrees of aversion to inflation relative to their dislike of output loss. Lower interest rates lead to greater output, which is desirable, and to higher inflation, which is not. But the true effects of interest rates on output and inflation are not known precisely. Thus, the preferred interest rate changes vary by beliefs on how strong the effect of interest rates on output is relative to its effect on inflation.

Second, MPC members differ in their backgrounds and expertise, and thereby bring different additional information to the committee. This ensures that the MPC benefits from a larger information set and can make better-informed decisions. The research finds important, and diverse, roles for developments in unemployment and foreign exchange, as well as equity and housing markets, in the votes of MPC members.

Third, current output levels are not known precisely, and there is even greater uncertainty regarding future output growth. Such uncertainty generates varying degrees of hawkishness and activism among MPC members.

‘Activist’ MPC members are more certain about the quality of their information and act very decisively in their preference for interest rate changes. Likewise, all factors considered, some members prefer lower interest rates than others, which leads to a classification along the ‘hawk-dove’ scale.

In addition to heterogeneity, there are also substantial interconnections between MPC members, due both to information sharing and strategic voting. This leads to fascinating network structures, highlighting substantial differences between members both in their influence within the committee and connectedness.

ENDS

‘Taking Personalities out of Monetary Policy Decision Making? Heterogeneity, Interactions and Committee Decisions in the Bank of England’s MPC’ by Arnab Bhattacharjee and Sean Holly

Arnab Bhattacharjee is at the University of Dundee and Sean Holly is at the University of Cambridge

Contact:

Arnab Bhattacharjee

+44 1382 384382

Email: