Consensus Model Law: Expository Essay

‘Monetary policy by committee: consensus, chairman dominance, or simple majority?’

Riboni and Ruge-Murcia (2010) develop a model and study the empirical implications of monetary policy-making by a committee under four different protocols, consensus model, agenda-setting model, dictator model, and simple-majority model. All models are estimated by maximum likelihood and the results show that the consensus model is a better fit with the actual data than other alternative models.

There are different aspects of literature focusing on the same area with the research of Riboni and Ruge-Murcia (2010). Firstly, the empirical previous studies on the monetary policy decision by the committees mostly rely on the Median Voter Theorem. For example, Waller (1989, 1992) construct the monetary policy model which has only a single central banker rather than a policy board to make a decision. He analyses the optimal term length for the board members and the committee size and finds that increases in the length of the term of board members and committee size affect the variability and uncertainty in policy to be reduced. However, this model leads to the issues of decision-making from different characteristics of each member of the policy board cannot be explored. Later, there are several kinds of literature that take this issue into account and develop the model that makes assumptions about the characteristics of monetary policy committees. Gerlach-Kristen (2009) examines the heterogenous preferences of monetary committees based on the voting record in the Bank of England. He concludes that external members dissent more frequently than internal members and tend to vote for lower interest rates during economic downturns. Moreover, the results show that the committee members are likely to influence other members in the policy discussion. Faust (1996) assumes that monetary policy committees have different preferences. He develops the model based on the overlapping generations model and concludes that the median voter’s preferences lead to the worse outcome since this median voting protocol might not reflect the optimal interest rates for society. Svensson (2005) develop a monetary policy model under an uncertainty framework. Suppose committee members have different preferences, the members might vote on the relative weight of inflation and output.

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However, Riboni and Ruge-Murcia (2010) analyze the impact of the committee’s preferences on monetary policy decisions under different voting procedures in terms of theoretical approach by developing the model under the procedure of each protocol since each voting procedure gives different aspects of the decision-making process. There are few previous studies that focus on different aspects of the decision-making process. Matsen and Roisland (2005) focus on four types of decision rules in the monetary union. The decision rules are as follows: Union rule, Benthamite rule, Majority rule, and Consensus rule. They apply the New Keynesian theoretical framework to analyze the implication of alternative decision-making processes. The results show that the consensus rule gives the highest variability of interest rates compared to alternative rules. For welfare comparison, increasing in loss of welfare is larger under the consensus rule and this consensus rule also provides the most unevenly distributed increase in loss. This suggests that the consensus rules give the interest rate further away from the interest rate preferred by countries. Gerlach-Kristen (2005) also uses the theoretical approach to examine the interest rate setting among three decision procedures; an optimal, averaging, and voting procedure. The model developed in this paper is assumed under the assumption that there is uncertainty in potential output. The results suggest that the voting procedure performs better than other procedures.

In addition, another strand of literature related to Riboni and Ruge-Murcia (2010) in term of empirical implications of monetary policy by committees have been increasing. Chappell et al. (2004) investigate the decision-making in the Federal Open Market Committee (FOMC) of the Federal Reserve. The analysis focuses on the competing pressures of majority rule, consensus building, and the power of the Chairman. They use the median voter as starting point for the analysis and extend the model to capture the role of the chairman and consensus procedure in the monetary decisions. They construct the original data set which contains the preferred interest rates of each committee member and estimate the monetary policy reaction function to calculate the preferred interest rates by using OLS regression. The results claim that the chairman has an enhanced power, approximately 40% to 50% of the voting weight in committee decisions.

However, Riboni and Ruge-Murcia (2010) focus on four types of voting protocol. Stating the consensus model, there are previous studies related to considering this model. Herrera et al. (1996) develop the consensus model under linguistic assessments. The constructed model in this paper is based on linguistic preferences to provide individuals’ opinions and allow the incorporation of human consistency in the decision-making model. Dal-Bo (2006) presents a theory of simple majority rule and consensus rule. He uses the classic monetary model to estimate the results and finds that the optimal supermajority in the consensus model is higher when committee preferences are more heterogenous and the economy is less volatile.

For the agenda-setting model, there is limited literature focusing on this model. First, Romer and Rosenthal (1978) propose the model under the assumption that the chairman has the power to control the proposal to the voters by having monopoly power before the electorate. The voters are forced to choose between the interest rates proposed by the agenda setter and the status quo. They construct a simple model including the expenditure proposal under agenda-setting behavior and claim that controlling the agenda benefits in minimizing the decision cost. Moreover, Eavey and Miller (1984) report laboratory experiments on the agenda-setting model. They test the prediction of the agenda-setting model in a one-dimensional policy space and report the results that the outcome of monetary policy is influenced by agenda control, suggesting the policy outcome produces deviations from interest rates preferred by median members. This is consistent with the results of Riboni and Ruge-Murcia (2010).

The previous literature provides a better understanding in the paper of Riboni and Ruge-Murcia (2010). However, we would like to examine the identifying assumption in the model constructed by Riboni and Ruge-Murcia (2010). The key assumption is that the preference of the monetary committee differs across different members. Each member has their own preferred interest rate which maximizes their utility. From this assumption, they do not consider any constraint in the model. For example, the time constraint and the size of committees’ constraints. As the policy performance of large committees can impact the outcome differs from the small size of committees. Moreover, the policy outcomes under the four voting protocols in the paper might be different if we consider the time constraint. Since the formation of the consensus model is time-consuming, the decisions are difficult to unanimously among large committees under a time constraint. The committee size and meeting duration are sensitive to the voting procedure (Maurin and Vidal 2014). Thus, we should consider these two factors in the modeling framework otherwise the results might be biased.

In addition, the five central banks used in the main paper (Riboni and Ruge-Murcia 2010) have selected committees from both internal and external members. These two types of members could also lead to different outcomes as internal members might have greater experience as central bankers and this could drive the internal-external differences. Hansen et al. (2013) claim that internal members are more hawkish than external members. Thus, considering how many internal and external members were in the meeting could give a better fit of policy outcome under voting protocols compared to the actual data or give different results since the proportion of internal and external committees in each central bank are not equal.

References

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