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Overconfidence, Monetary Policy Committees and Chairman Dominance

  • Carl Andreas Claussen

    ()

    (Sveriges Riksbank and Norges Bank (Central Bank of Norway))

  • Egil Matsen

    ()

    (Norwegian University of Science and Technology and Norges Bank)

  • Øistein Røisland

    ()

    (Norges Bank (Central Bank of Norway))

  • Ragnar Torvik

    ()

    (Norwegian University of Science and Technology and Norges Bank)

We suggest that overconfidence among policymakers explains why formal decision power over monetary policy is given to committees, while much of the real power to set policy remains with central bank chairmen. Overconfidence implies that the chairman underweights advice from his staff, increasing policy risk if he alone decides. A committee with decision power reduces this risk, because it induces moderation from the chairman. Overconfidence also yields disagreement and dissent in the committee, consistent with evidence from monetary policy committees. As the chairman is on average better informed, through his wider access to the staff, this would give him a suboptimal influence if policy is set through simple majority voting. Giving the chairman extra decision power, through e.g. agenda-setting rights, restores his influence. A monetary policy committee with a strong chairman balances the risks and influence distortions that occur if policymakers are overconfident.

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File URL: http://www.norges-bank.no/en/Published/Papers/Working-Papers/2009/WP-200917/
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Paper provided by Norges Bank in its series Working Paper with number 2009/17.

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Length: 21 pages
Date of creation: 13 Oct 2009
Date of revision:
Handle: RePEc:bno:worpap:2009_17
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