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Central Banking by Committee

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  • Anne Sibert

Abstract

There is a small, but growing, economics literature on the importance and effects of having monetary policy made by a committee, rather than by an individual. Complimenting this is an older and larger body of literature on groups in the other social sciences, particular in social psychology. This paper provides a review of some of this work, focusing on two important features of committees: the effect of their size on performance and whether or not they are more moderate than the members who make them up. Individual members of a committee acquire idiosyncratic information which the committee uses to make a decision. A result of the famous Condorcet Jury Theorem is that larger committees have more resources, in the form of more information, and are thus better than smaller ones. This result depends on individuals being willing to work as hard at gathering information when they are members of a committee as they would be willing to work if they were acting alone. The economics literature suggests that this may not hold; that individual members may have an incentive to shirk. This phenomenon of a member withholding effort is called social loading in the social pyschology literature. Studies stretching over 125 years document its existence and suggest that it becomes more important as committee size increases and that it disappears when individual members contributions can be identified and evaluated. The Condorcet Jury Theorem also depends on the committee being able to aggregate members information and on members being willing to truthfully reveal their information. An excessively formal meeting structure may cause the former to fail to hold; committee members with different objectives may cause the latter not to be true. As a result of shirking and coordination problems, smaller committees may be better than larger ones and the optimal size for a committee is an empirical issue. Committees pool members information and views, thus it seems that monetary policy made by a committee should be more moderate than monetary policy made by a single individual. However, several hundred studies demonstrate that belonging to a committee polarizes its members and, hence, committees may be more extreme than individuals. A particularly harmful form of group polarization occurs when committee members striving for consensus causes them to stop paying suffcient attention to alternative courses of action. In this case the committee may make terrible decisions that none of its members would have made on their own. The results of the literature on committee size and committee polarization suggest that the ideal monetary policy committee may not have many more than five members. It should have a well defined objective and it should publish the votes of its members. It should be structured so that members do not act as part of a group, perhaps by having short terms in office and members from outside the central bank. External scrutiny of the decision-making process should be encouraged.

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Bibliographic Info

Paper provided by Netherlands Central Bank, Research Department in its series DNB Working Papers with number 091.

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Date of creation: Feb 2006
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Handle: RePEc:dnb:dnbwpp:091

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Keywords: committees; monetary policy.;

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  1. Hao Li & Sherwin Rosen & Wing Suen, 2000. "Conflicts and Common Interests in Committees," Econometric Society World Congress 2000 Contributed Papers 0341, Econometric Society.
  2. Christopher J. Waller, 2000. "Policy Boards And Policy Smoothing," The Quarterly Journal of Economics, MIT Press, vol. 115(1), pages 305-339, February.
  3. Drora Karotkin & Jacob Paroush, 2003. "Optimum committee size: Quality-versus-quantity dilemma," Social Choice and Welfare, Springer, vol. 20(3), pages 429-441, 06.
  4. Ley, E. & Steel, M.FJ., 1995. "A Model of Management Teams," Papers 9586, Tilburg - Center for Economic Research.
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  6. Kiel, Alexandra & Gerling, Kerstin & Schulte, Elisabeth & GrĂ¼ner, Hans Peter, 2003. "Information acquisition and decision making in committees: a survey," Working Paper Series 0256, European Central Bank.
  7. Alan S. Blinder, 1999. "Central Banking in Theory and Practice," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262522608, December.
  8. Sushil Bikhchandani & David Hirshleifer & Ivo Welch, 1998. "Learning from the Behavior of Others: Conformity, Fads, and Informational Cascades," Journal of Economic Perspectives, American Economic Association, vol. 12(3), pages 151-170, Summer.
  9. Whyte, Glen, 1993. "Escalating Commitment in Individual and Group Decision Making: A Prospect Theory Approach," Organizational Behavior and Human Decision Processes, Elsevier, vol. 54(3), pages 430-455, April.
  10. Akerlof, George A, 1991. "Procrastination and Obedience," American Economic Review, American Economic Association, vol. 81(2), pages 1-19, May.
  11. Alan S. Blinder & John Morgan, 2000. "Are Two Heads Better Than One?: An Experimental Analysis of Group vs. Individual Decisionmaking," NBER Working Papers 7909, National Bureau of Economic Research, Inc.
  12. Gerlach-Kristen, Petra, 2005. "Too little, too late: Interest rate setting and the costs of consensus," Economics Letters, Elsevier, vol. 88(3), pages 376-381, September.
  13. Lombardelli, Clare & Proudman, James & Talbot, James, 2005. "Committees Versus Individuals: An Experimental Analysis of Monetary Policy Decision Making," MPRA Paper 823, University Library of Munich, Germany.
  14. Cason, Timothy N & Mui, Vai-Lam, 1997. "A Laboratory Study of Group Polarisation in the Team Dictator Game," Economic Journal, Royal Economic Society, vol. 107(444), pages 1465-83, September.
  15. Sah, Raaj Kumar & Stiglitz, Joseph E, 1988. "Committees, Hierarchies and Polyarchies," Economic Journal, Royal Economic Society, vol. 98(391), pages 451-70, June.
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  1. Governance of bank supervision is central to its success
    by ? in Bruegel blog on 2012-08-31 10:06:28
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