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Optimal monetary policy committee size: Theory and cross country evidence

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  • Szilárd Erhart

    ()
    (Magyar Nemzeti Bank)

  • Jose-Luis Vasquez-Paz

    (Banco Central de Reserva del Peru)

Abstract

Theoretical and empirical studies of different sciences suggest that an optimal committee consists of roughly 5-9 members, although it can swell mildly under specific circumstances. This paper develops a conceptual model in order to analyze the issue in case of monetary policy formulation. The optimal monetary policy committee (MPC) size varies according to the uncertainty of MPC members’ information influenced by the size of the monetary zone and overall economic stability. Our conceptual model is backed up with econometric evidence using a 2006 survey of 85 countries. The survey is available for further research and published on the web. The MPC size of large monetary zones (EMU, USA, Japan) is close to the estimated optimal level, but there exist several smaller countries with too many or too few MPC members.

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Bibliographic Info

Paper provided by Magyar Nemzeti Bank (the central bank of Hungary) in its series MNB Working Papers with number 2007/6.

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Length: 32 pages
Date of creation: 2007
Date of revision:
Handle: RePEc:mnb:wpaper:2007/6

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Keywords: monetary policy committe; mpc size; decision making.;

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References

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  1. Helge Berger, 2006. "Optimal central bank design: Benchmarks for the ECB," The Review of International Organizations, Springer, vol. 1(3), pages 207-235, September.
  2. Kiel, Alexandra & Gerling, Kerstin & Schulte, Elisabeth & Grüner, Hans Peter, 2003. "Information acquisition and decision making in committees: a survey," Working Paper Series 0256, European Central Bank.
  3. Anne Sibert, 2006. "Central Banking by Committee," DNB Working Papers 091, Netherlands Central Bank, Research Department.
  4. Jan Marc Berk & Beata K. Bierut, 2003. "Committee structure and its implications for Monetary policy decision-making," MEB Series (discontinued) 2003-05, Netherlands Central Bank, Monetary and Economic Policy Department.
  5. Benjamin E. Hermalin & Michael S. Weisbach, 2003. "Boards of directors as an endogenously determined institution: a survey of the economic literature," Economic Policy Review, Federal Reserve Bank of New York, issue Apr, pages 7-26.
  6. 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.
  7. Clare Lombardelli & James Proudman & James Talbot, 2002. "Committees versus individuals: an experimental analysis of monetary policy decision-making," Bank of England working papers 165, Bank of England.
  8. Alan S. Blinder & John Morgan, 2007. "Leadership in Groups: A Monetary Policy Experiment," NBER Working Papers 13391, National Bureau of Economic Research, Inc.
  9. JoAnne Morris & Tonny Lybek, 2004. "Central Bank Governance," IMF Working Papers 04/226, International Monetary Fund.
  10. Berger, Helge & Nitsch, Volker & Lybek, Tonny, 2008. "Central bank boards around the world: Why does membership size differ?," European Journal of Political Economy, Elsevier, vol. 24(4), pages 817-832, December.
  11. Gerlach-Kristen, Petra, 2006. "Monetary policy committees and interest rate setting," European Economic Review, Elsevier, vol. 50(2), pages 487-507, February.
  12. Helge Berger & Tonny Lybek & Volker Nitsch, 2006. "Central Bank Boards Around the World," IMF Working Papers 06/281, International Monetary Fund.
  13. Gabel, Matthew J. & Shipan, Charles R., 2004. "A social choice approach to expert consensus panels," Journal of Health Economics, Elsevier, vol. 23(3), pages 543-564, May.
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Citations

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Cited by:
  1. Alan S. Blinder, 2008. "On the design of monetary policy committees," Working Paper 2008/06, Norges Bank.
  2. Horvath, Roman & Rusnak, Marek & Smidkova, Katerina & Zapal, Jan, 2011. "Dissent voting behavior of central bankers: what do we really know?," MPRA Paper 34638, University Library of Munich, Germany.
  3. RIBONI, Alessandro & RUGE-MURCIA, Francisco J., 2008. "Monetary Policy by Committee: Consensus, Chairman Dominance or Simple Majority?," Cahiers de recherche 02-2008, Centre interuniversitaire de recherche en économie quantitative, CIREQ.
  4. Helge Berger & Volker Nitsc, 2011. "Too Many Cooks? Committees in Monetary Policy," Southern Economic Journal, Southern Economic Association, vol. 78(2), pages 452-475, October.
  5. Alan S. Blinder & John Morgan, 2007. "Leadership in Groups: A Monetary Policy Experiment," NBER Working Papers 13391, National Bureau of Economic Research, Inc.
  6. Berger, Helge & Nitsch, Volker & Lybek, Tonny, 2008. "Central Bank boards around the world: why does membership size differ?," Discussion Papers 2008/5, Free University Berlin, School of Business & Economics.
  7. Szilárd Erhart & Harmen Lehment & Jose L. Vasquez Paz, 2007. "Monetary Policy Committee Size and Inflation Volatility," Kiel Working Papers 1377, Kiel Institute for the World Economy.
  8. Jung, Alexander & Kiss, Gergely, 2012. "Preference heterogeneity in the CEE inflation-targeting countries," European Journal of Political Economy, Elsevier, vol. 28(4), pages 445-460.
  9. Alan S. Blinder, 2009. "Making Monetary Policy by Committee," International Finance, Wiley Blackwell, vol. 12(2), pages 171-194, 08.

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