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Monetary policy decision-making when information search is costly

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  • Jung, Alexander
  • Mongelli, Francesco

Abstract

This paper explores monetary policy decision-making within an insurance model with expected utility-maximizing policy-makers. The authors consider that policy-makers are different in terms of their backgrounds, experience and skills and they may disagree on the appropriate policy response. In a monetary policy committee, they share information and decide on interest rates by means of an agreed voting rule. The authors show that, in the presence of risk and search costs, it would be optimal for policy-makers to fully insure against the expected loss from a potential policy error. Whether a monetary policy committee sufficiently hedges against this risk will depend on several factors such as the skills of policy-makers, the distribution of members’ beliefs, and the committee’s (statutory) voting rule, but also on other factors not captured by the model.

Suggested Citation

  • Jung, Alexander & Mongelli, Francesco, 2013. "Monetary policy decision-making when information search is costly," MPRA Paper 80517, University Library of Munich, Germany, revised 25 May 2016.
  • Handle: RePEc:pra:mprapa:80517
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    File URL: https://mpra.ub.uni-muenchen.de/80517/1/MPRA_paper_80517.pdf
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    References listed on IDEAS

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    1. Gerling, Kerstin & Gruner, Hans Peter & Kiel, Alexandra & Schulte, Elisabeth, 2005. "Information acquisition and decision making in committees: A survey," European Journal of Political Economy, Elsevier, vol. 21(3), pages 563-597, September.
    2. Taleb, Nassim Nicholas, 2007. "Black Swans and the Domains of Statistics," The American Statistician, American Statistical Association, vol. 61, pages 198-200, August.
    3. Adam, Klaus & Billi, Roberto M., 2008. "Monetary conservatism and fiscal policy," Journal of Monetary Economics, Elsevier, vol. 55(8), pages 1376-1388, November.
    4. Jan Marc Berk & Beata Bierut, 2008. "Monetary Policy Committees: meetings and outcomes," DNB Working Papers 184, Netherlands Central Bank, Research Department.
    5. Lutz Kilian & Simone Manganelli, 2008. "The Central Banker as a Risk Manager: Estimating the Federal Reserve's Preferences under Greenspan," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 40(6), pages 1103-1129, September.
    6. Paul R. Krugman, 1998. "It's Baaack: Japan's Slump and the Return of the Liquidity Trap," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 29(2), pages 137-206.
    7. Alan Greenspan, 2004. "Risk and Uncertainty in Monetary Policy," American Economic Review, American Economic Association, vol. 94(2), pages 33-40, May.
    8. Fama, Eugene F, 1970. "Efficient Capital Markets: A Review of Theory and Empirical Work," Journal of Finance, American Finance Association, vol. 25(2), pages 383-417, May.
    9. Jan Marc Berk & Beata K. Bierut, 2005. "Communication in Monetary Policy Committees," DNB Working Papers 059, Netherlands Central Bank, Research Department.
    10. Arnott, Richard J & Stiglitz, Joseph E, 1988. " The Basic Analytics of Moral Hazard," Scandinavian Journal of Economics, Wiley Blackwell, vol. 90(3), pages 383-413.
    11. Wieland Volker, 2006. "Monetary Policy and Uncertainty about the Natural Unemployment Rate: Brainard-Style Conservatism versus Experimental Activism," The B.E. Journal of Macroeconomics, De Gruyter, vol. 6(1), pages 1-34, March.
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    Citations

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    Cited by:

    1. Nuno Cassola & Christoffer Kok & Francesco Paolo Mongelli, 2019. "The ECB after the crisis: existing synergies among monetary policy, macroprudential policies and banking supervision," Working Papers 424, University of Milano-Bicocca, Department of Economics, revised Dec 2019.

    More about this item

    Keywords

    monetary policy committee; analysis of collective decision-making; search costs; voting behavior;

    JEL classification:

    • D72 - Microeconomics - - Analysis of Collective Decision-Making - - - Political Processes: Rent-seeking, Lobbying, Elections, Legislatures, and Voting Behavior
    • D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty
    • D83 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Search; Learning; Information and Knowledge; Communication; Belief; Unawareness
    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies

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