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Explaining interest rate decisions when the MPC members believe in different stories

  • Carl Andreas Claussen

    ()

    (Sveriges Riksbank (Central Bank of Sweden))

  • Øistein Røisland

    ()

    (Norges Bank (Central Bank of Norway))

Modern central banks do not only announce the interest rate decision, they also communicate a "story" that explains why they reached the particular decision. When decisions are made by a committee, it could be difficult to find a story that is both consistent with the decision and representative for the committee. Two alternatives that give a unique and consistent story are: (i) vote on the interest rate and let the winner decide the story, (ii) vote on the elements of the story and let the interest rate follow from the story. The two procedures tend to give different interest rate decisions and different stories due to an aggregation inconsistency called the "discursive dilemma". We investigate the quality of the stories under the two approaches, and find that alternative (ii) gives stories that tend to be closer to the true (but unobservable) story. Thus, our results give an argument in favour of premise-based, as opposed to conclusion-based, decisionmaking.

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File URL: http://www.norges-bank.no/en/Published/Papers/Working-Papers/2013/WP-201307/
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Paper provided by Norges Bank in its series Working Paper with number 2013/07.

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Length: 19 pages
Date of creation: 08 Feb 2013
Date of revision:
Handle: RePEc:bno:worpap:2013_07
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  1. Anand, Paul & Pattanaik, Prasanta & Puppe, Clemens (ed.), 2009. "The Handbook of Rational and Social Choice," OUP Catalogue, Oxford University Press, number 9780199290420, March.
  2. Carl Andreas Claussen & Egil Matsen & Øistein Røisland & Ragnar Torvik, 2009. "Overconfidence, Monetary Policy Committees and Chairman Dominance," Working Paper 2009/17, Norges Bank.
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