The Monetary Policy Committee
and the Incentive Problem:
A Selective Survey
Hiroshi FujikiThis paper strives to answer five questions. First, why do legislators choose
to create an independent central bank? Second, why do legislators delegate
the conduct of monetary policy to a committee, rather than to a central
bank governor? Third, what kinds of factors are crucial in limiting thesize of the committee? Fourth, should the committee disclose individual
members’ voting records in addition to their policy decisions? Fifth, to what
extent do current committee members constrain the decisions of futurecommittee members? A selective review of the relevant economic literaturesuggests the conclusion that there is reasonable consensus on the first andsecond questions. The remaining three questions are still unresolved.
Keywords: Central bank independence; Monetary policy committee;
Voting; Transparency; Commitment
JEL Classification: E58

Director and Senior Economist, Institute for Monetary and Economic Studies, Bank of Japan(E-mail: hiroshi.fujiki@boj.or.jp)
The author thanks Marvin Goodfriend and Ulrich Kohli for their very helpful discussions andcomments. The author thanks Erdem Başçi, Jan Marc Berk, Alex Bowen, Jean-Philippe Cotis,
Wolfgang W. Fritsch, Petra Gerlach-Kristen, Hans Gersbach, Francesco Giavazzi, Yukinobu
Kitamura, Bennett T. McCallum, Maurice Obstfeld, George Pickering, Christopher Waller,
Jeromin Zettelmeyer, and staff of the Bank of Japan (BOJ) for their helpful comments. Kiyoshi
Watanabe provided excellent research assistance. The views expressed in this paper are solely theauthor’s own and do not necessarily represent the view of the BOJ or the Institute for Monetaryand Economic Studies.
MONETARY AND ECONOMIC STUDIES (SPECIAL EDITION)/OCTOBER 2005
DO NOT REPRINT OR REPRODUCE WITHOUT PERMISSION.

37

My experience as a member of the FOMC left me with a strong feeling that thetheoretical fiction that monetary policy is made by a single individual maximizing a well-defined preference function misses something important. In my view,monetary theorists should start paying attention to the nature of decision making
by committee, which is rarely mentioned in the academic literature.1

I. Introduction
The nature of decision making by a monetary policy committee is a relatively new
subject for academic economists. The literature on such decision making covers a wide
range of topics. Among them, I pay attention to two broad issues in this paper. First,
I analyze the rationale for an independent monetary policy committee. Second, where there
is such a committee, I assess the extent of the information that the committee discloses.
Regarding the first topic, episodes of worldwide inflation in the late 1970s
convinced monetary economists that inflation was a monetary phenomenon. These
episodes also convinced monetary economists that legislators preferred to delegatemonetary policy to unelected technocrats.
This consensus among monetary economists promoted many institutional changes.
The Roll report (Roll et al. [1993]) summarizes the argument for these changes, and the
U.K. government gave the Bank of England (BOE) responsibility for setting interest rates
to meet the government’s stated inflation target in 1997. In the later 1980s and the 1990s,
many central banks, such as the Bank of Japan (BOJ), the Reserve Banks of New Zealandand Australia, and the European Central Bank (ECB), also obtained independence.
But the delegation to unelected technocrats now may not be enough to conclude
that the current institutional structure of central banks should be taken for granted.
I offer three examples below.
First, legislators can, in principle, change their minds. What prevents legislatorsfrom changing a central bank’s institutional framework?
Second, in the United Kingdom, on May 6, 1997, the BOE’s Monetary Policy
Committee replaced the previous system in which a single individual—the Chancellorof the Exchequer—decided the appropriate level of U.K. base rates. However, does itreally make sense to delegate to a committee, rather than an individual? Why not let
an expert central banker make decisions on monetary policy?
Third, what if legislators in many economies within the monetary union are responsible for choosing the committee members of a single monetary policy, as in theenlarged European Union? How many committee members should the new enlarged
committee have? Even within some selected economies surveyed by Fracasso, Genberg,
and Wyplosz (2003), as Table 1 shows, the number of committee members varies from
central bank to central bank.2 What explains these cross-sectional variations in thesize of committee members?3
1. Blinder (1998, p. 22).
2. According to Mahadeva and Sterne (2000), the decision makers at central banks vary from monetary union tomonetary union: either individual (nine central banks) or committee (79 central banks).
3. Table 5 of Lybek and Morris (2004) shows the cross-country variation in number of members in different types ofboards at central banks based on their survey of 101 central bank laws.

38 MONETARY AND ECONOMIC STUDIES (SPECIAL EDITION)/OCTOBER 2005

The Monetary Policy Committee and the Incentive Problem: A Selective Survey

Table 1 Monetary Policy Decision Making at Selected Central BanksCountry/region

EuropeJapan

United States

Central bank

Bank of Japan

Federal Reserve
Board

Monetary policy
committee

Policy Board

Federal Open
MarketCommittee(FOMC)

Governing
CouncilMonetary Policy
Committee

Reserve Bank
Board

9
(0)

12
(0)

18
(0)

9
(4)

9
(7)

Simple majority
voting2

Voting

Simple majority
voting3

Simple majority
voting2

Simple majority
voting2

Yes

Yes

None

Yes

None

(About amonth’s delay)(The minutes ofeach meeting are
made available
on the Thursday
after the next
regularly
scheduledmeeting.)

Yes

Yes

Size of the monetary
policy committee(number of committee
members appointed fromexternal organizations)
Decision process1
Publication of minutes(Frequency)

Publication of transcripts

United Kingdom

European Central
Bank of EnglandBank

Australia
Reserve Bank
of Australia(About two
weeks’ delay
plus individual
votes)None

None

Target price index for
inflation targeting

Consumer priceindex (CPI)

CPI

Target width for inflation
targeting

2 percent as
2–3 percent, on
measured by theaverage, over the
12-monthcycle
increase(Frequency)

Inflation forecast
made by
Evaluation of monetary
policy by externalorganizations

None(10 years’ delay) (five years’ delay)(Policy Board)
None

None

None

Monetary Policy
Committee

Staff

None

None

Notes: 1. I define three types of decision process in central banks below.
(1) “Simple majority voting” means central banks where statements in the central bank act prescribe
majority voting or the chairperson has the casting vote.
(2) “Voting” means central banks where the committees vote on the policy but other legal provisions about
decision-making process are not found.
(3) “Consensus” means central banks where the collective decision-making processes in the committee are notexplicitly stipulated.
2. The chairperson can break a tie.
3. The president can break a tie.
4. The minister of finance has the authority to direct the governor to follow a specific policy course.
Sources: Websites of central banks, revised from Fracasso, Genberg, and Wyplosz (2003, table 1.2).

(Continued on next page)

39

Table 1 (continued)
Country/region

CanadaNew ZealandCentral bank

Bank of Canada

Reserve Bankof New Zealand

Monetary policy
committee

Governing Council4

NorwayPhilippines

Norges Bank

Bangko Sentral
ng Pilipinas

Executive Board

Monetary Board

Size of the monetary
policy committee(number of committee
members appointed fromexternal organizations)

6
(0)

1
(0)

7
(0)

7
(0)

Decision process1

VotingGovernor

Simple majority
voting

Simple majority
votingPublication of minutes

None

None

None

Highlights of the
Meeting on Monetary
Policy Issues

None

None

None

None

Target price index for
inflation targetingCore CPI

CPI

CPI

Headline CPI
excluding foodand energy

Target width for inflation
targeting

2 percent, target
range 1–3 percent

1–3 percent on
average over the
medium term

2.5 percent

4.5–5.5 percent

Inflation forecast
made byGoverning Council

Staff

Staff

Staff

None

Yes

Yes

None

(Frequency)

Publication of transcripts(Frequency)

Evaluation of monetary
policy by externalorganizations

40 MONETARY AND ECONOMIC STUDIES (SPECIAL EDITION)/OCTOBER 2005

The Monetary Policy Committee and the Incentive Problem: A Selective Survey

Table 1 (continued)
Country/region

South Korea

SwedenSwitzerland

ThailandCentral bank

Bank of Korea

Sveriges Riksbank

Swiss National Bank

Bank of Thailand

Monetary policy
committee

Monetary Policy
Committee

Executive Board

Governing Board

Monetary Policy
Committee

7
(4)

7
(0)

3
(0)

7
(4)

Simple majority
voting

Simple majority
voting2

Consensus

Consensus

Yes

Yes

None

None

Size of the monetary
policy committee(number of committee
members appointed fromexternal organizations)
Decision process1
Publication of minutes(Frequency)

Publication of transcripts(Two weeks’ delay)

Yes

None

None

None

Target price index for
inflation targetingCore CPICPI

CPICore CPI

Target width for inflation
targeting

2.5–3.5 percent for
the average rate forthe three-year period
2004–06

2 percent (plus/minus
1 percentage pointaround this target)

Less than 2 percent
per annum

0–3.5 percent

Inflation forecast
made by

Staff

Executive Board

Governing Board

Staff

Evaluation of monetary
policy by externalorganizations

None

None

None

None

(Frequency)

Notes: 1. I define three types of decision process in central banks below.
(1) “Simple majority voting” means central banks where statements in the central bank act prescribe
majority voting or the chairperson has the casting vote.
(2) “Voting” means central banks where the committees vote on the policy but other legal provisions about
decision-making process are not found.
(3) “Consensus” means central banks where the collective decision-making processes in the committee are notexplicitly stipulated.
2. The chairperson can break a tie.
3. The president can break a tie.
4. The minister of finance has the authority to direct the governor to follow a specific policy course.
Sources: Websites of central banks, revised from Fracasso, Genberg, and Wyplosz (2003, table 1.2).

41

Regarding the second topic, the extent of the information that the committee
discloses, a variety of literature emerges from the debate over more practical issues of
disclosure at some central banks. I consider points that emerged from the following
historical episodes.
In the 1980s, some literature on the publication of short-term interest rate targets
emerged from the discussion originating from a U.S. court trial from 1975 to 1981,
which forced the Federal Open Market Committee (FOMC) to justify the delay of
90 days for the publication of its directive, which included short-term objectives
for federal funds rate tolerance ranges and money stock growth. The FOMC refused
to publicize the directive immediately and ultimately won the case. The classic on
this subject, Goodfriend (1986), summarizes five reasons offered by the FOMC
against the disclosure of the directive in terms of economic theory: (1) unfair speculation; (2) inappropriate market reaction; (3) harm to the government’s commercial
interest; (4) undesirable commitment; and (5) more difficult interest rate smoothing.
Goodfriend (1986) then describes the benefits and costs of central bank secrecy.
Many points made in the debate on the disclosure of the current directive
reappear in the debate over the disclosure on the course of future interest rate policyin the era of low inflation in some economies, notably Japan and the United States.
New literature on the zero bound of nominal interest rate policy suggests that expectation management through a credible commitment to the future course of interest
rates is important. Consistent with this idea, the U.S. Federal Reserve made so-called“conditional commitments,” and so has the BOJ.
A new and important practical point in this debate is that central bank committee
members change over time. There is no reason for the new members to follow the commitment made by the former members (King [2004]). To what extent do committee
members credibly commit to the future course of interest rates?
In the late 1990s, a debate over transparency developed. For example, Briault,
Haldane, and King (1997) discuss the democratic legitimacy of an independent bank,which needs to be accountable and transparent to governments’ policy decisions.
Economists agree that transparency is, in principle, important for a central bank.4
However, in practice, the variety of information released by various central banks
differs widely. For example, even within selected economies, as Table 1 shows, thedecision on whether to publish minutes or transcripts varies from central bank tocentral bank. One notable example is a debate over the disclosure of monetary policy
decision making between Buiter (1999) and Issing (1999).
Buiter (1999) requests that the ECB publish the minutes of policy meetings of theGoverning Council and an individual voting record. He considers that whatever theformal confidentiality of the ECB Council meetings and votes, the national heads ofgovernment will know exactly who voted in favor of what, thus political pressures from
4. Faust and Svensson (2002) consider endogenous choice of monetary control and transparency, in the sense thata public knows about the monetary shock more precisely. Walsh (2003) proposes a model to implement inflation
targeting in a New Keynesian monetary economics model under imperfect information in which the central bankhas become a source of discretion. See Carpenter (2004) for a review of academic literature on transparency in the
instruments, goals, and implementation of monetary policy. Lybek and Morris (2004) review central bank laws
and show that legally independent central banks are accountable to the legislature for monetary policy, whilelegally less independent central banks are accountable to the ministry of finance (see especially table 3, p. 18).

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The Monetary Policy Committee and the Incentive Problem: A Selective Survey

the national governments are unavoidable. He considers that the exercise of undue
influence is not deterred by secrecy and confidentiality, but only by openness. He goeson to argue that “confidentiality of the votes also destroys any vestige of individual
accountability of ECB board members. It encourages excessive consensus-seeking
and compromise.”Issing (1999) responds that the publication of voting records is in itself good forindividual accountability. However, in practice, the publication of voting records
without the real-time publication of detailed minutes will force market participants
to predict individual members’ voting patterns, and legislators and interest groups
will try to put pressure on some individuals to see if their pressure results in theirpreferred outcome.5
The serious question for an economist is as follows: Under specific conditions,what kind of information should the central bank disclose? This debate produces
a large academic literature on the pros and cons for the disclosure of individual
voting records.
These episodes show us that central banking economists should pay serious attention to the nature of decision making by monetary policy committees. I therefore
strive, in this paper, to answer the five questions below.
First, why do legislators choose to create an independent central bank? Second,
why do legislators delegate the conduct of monetary policy to a committee, rather than
to a central bank governor? Third, what kinds of factors are crucial in limiting thesize of the committee? Fourth, should the committee disclose individual members’
voting records in addition to their policy decisions? Fifth, to what extent do current
committee members constrain the decisions of future committee members?
To answer those questions, I pay special attention to the economic literature
on incentive problems. The incentive problem may be relevant to legislators orcommittee members, depending on the nature of questions. The incentive problem
may arise from dynamic inconsistency in economic policymaking, from the free rider
problem for the cost of obtaining relevant information for monetary policy, or fromthe preference for longer terms of office, depending on the nature of questions.
The literature on operational transparency, following the definition by Hahn
(2002), helps answer my second, third, and fourth questions. Operational transparency in Hahn’s definition includes the announcement of decisions regarding theshort-term interest rate.6 Operational transparency also includes the disclosure of
information on how decisions are made: the voting, and publication of the minutesof the meeting.
In papers on operational transparency in Hahn’s (2002) definition, economists
model a wide variety of private information and institutions to solve the asymmetric
5. Regarding this point, Meyer (2004, p. 77) says: “To be sure, the media delighted in separating us into hawks anddoves, to see the feathers fly (which happened occasionally around the table, in vigorous debate). But when it
came to the vote, the tendency was to join the majority view. In this way, we remained birds of a feather.”
6. Hahn (2002) defines transparency as the alleviation of information asymmetries by the publication of the central
bank’s private information that is relevant for the policymaking process. He distinguishes three types of transparency:
goal transparency, knowledge transparency, and operational transparency. Goal transparency means transparency
regarding the central bank objectives, such as the announcement of numerical inflation targets, or loss functions.
Knowledge transparency means the publication of models used inside the central bank, and economic data such as
the inflation forecast. Operational transparency includes the disclosure of information on how decisions are made.

43

information problem. The policy suggestions in these papers should be taken withcare, especially their assumptions.7
Note that I focus on the literature on the behavior of central bank monetary policy
committees. I do not review the literature on other important issues, for example,
the monetary transmission mechanism.8 Note also that I answer the five questions by
surveying various economic models. The economic models include the monetary
economics models of central bank independence, the models of collective decision
making in juries, and the models of game theory.
After reviewing economic literature on those five questions, I offer some examples
based on Japan’s experience. The examples invite readers to apply the theoreticalmodels surveyed in this paper to the Japanese experience, and should help readers toassess the applicability of that literature to other central banks.
Before moving on to details of the literature review, I summarize my tentative
answers to the questions in this paper below based on the survey.
First, giving a long-term contract to an independent central bank governor gives
the central banker an incentive to put more effort into the policymaking process thanan elected politician would. This extra effort translates, in expectations, into better
forecasts and fewer policy mistakes. The effort increases benefits to society, and thelegislator’s own utility increases compared with those legislators who run monetary
policy by themselves. Delegation to an independent central banker should be an
incentive-compatible proposition to legislators.
Second, some theoretical models show that decisions made by committees are
better than those of an individual, in cases where there is an incentive for individual
members of a monetary policy committee to gain reputations as inflation fighters, orwhere an opportunistic central banker desires to mimic a nonopportunistic central
banker, or where there is electoral uncertainty that influences the degree of stabilization
policy determined by politically appointed central bank committee members.
Third, the classic Condorcet jury theorem suggests that a larger committee will
make a better decision. In practice, the committee members may vote based not only
on their private signals but also on their inferences about other members’ private
signals, may not obtain signals relevant to their decisions at zero cost, and may exchange
views before voting. Under those situations, the Condorcet results may fail. The
optimal committee size weighs the benefit of a diversity of views in a larger committee
against the risk of free-riding due to the cost of obtaining relevant information.
Fourth, in theory, voting transparency may be beneficial or problematic. In practice, for a committee that respects diversity of individual opinion and does not strive
for group ownership of its decision, the disclosure of voting might make sense to
7. Geraats (2002) surveys central bank transparency with special emphasis on the distinction between the uncertainty
and incentive effects of transparency. The uncertainty effect of asymmetric information means that asymmetric
information generates uncertainty for the agents who experience the information disadvantage, and provides anopportunity for others to directly exploit the availability of private information. The incentive effect of asymmetric
information means that those with access to private information may try to manipulate the beliefs of others
through signaling, and the response to the signal could influence the sender’s incentives and thereby indirectly
alter economic behavior. Geraats (2002) shows that it is generally possible to distinguish between the uncertainty
and incentive effects of transparency, but their consequences depend crucially on the precise circumstances.
8. See Piga (2000) for a review of the literature of central bank independence and a list of unanswered topics, such aspolitical accountability and the optimal term length of board members.

44 MONETARY AND ECONOMIC STUDIES (SPECIAL EDITION)/OCTOBER 2005

The Monetary Policy Committee and the Incentive Problem: A Selective Survey

provide a useful indicator of balancing the competing consideration. For a committeethat prizes solidarity and strives for group ownership of any decision it makes, while
potentially many interest groups may put pressure on their actions, it makes sense to
suppress the voting record in the interest of maintaining group harmony.
Fifth, in theory, collective decisions made by current committee members today
may fail to bind future collective decisions made by future committee members.
However, the Japanese experience of commitment to a procedure for money market
operations until the consumer price index (CPI, excluding perishables, on a nationwide
basis) registers stably zero percent or an increase year on year shows a counterexample
to the argument. Economists need to make greater effort to interpret this experienceand present a reasonably acceptable model based on it.
The organization of the rest of this paper is as follows. Section II reviews theliterature on the needs of an independent central bank. Section III surveys theliterature on the needs of the monetary policy committee. Section IV touches on
the optimal number of committee members. Section V discusses the pros and consof disclosing the vote. Section VI reports some literature on the difficulty of forcing
future committee members to honor current members’ commitments. Section VII
presents issues for discussions based on the Japanese experience. Section VIII concludes
the paper.

II. Why Do Legislators Delegate Monetary Policy
to an Independent Central Bank?
This section first selectively reviews papers on the question: Why should we have an
independent central bank, run by a committee or an independent central banker?
I think monetary economists agree on this issue. This section then reviews classic
papers based on an idea of dynamic inconsistency, and a paper by Eggertsson and
Le Borgne (2004), which does not rely on dynamic inconsistency. The rationale fordelegating monetary policy to an independent central banker is that he or she is given
a long-term job contract; this, in turn, gives the central banker an incentive to put
more effort into the policymaking process than an elected legislator would.
A. Insights from Literature on Monetary Economics
Why should we have an independent central bank, run by a committee or an independent central banker? A common and well-established answer is that a central bankshould be better insulated from the short-term political pressures of the electoral
cycle. For example, Blinder (1998, p. 56) suggests that the nature of monetary policy
requires a long time horizon: “Many governments wisely try to depoliticize monetary
policy by, and e.g., putting it in the hands of unelected technocrats with long termsof office and insulation from the hurly-burly of politics.”9
9. The members of the U.S. Board of Governors of the Federal Reserve System have unusually long terms: 14 years.
Table 9 of Lybek and Morris (2004) shows that if the term is fixed, it is often around five years based on theirsurvey of 101 central bank laws.

45

Do economic models justify such an argument? The classic paper on dynamic
inconsistency by Kydland and Prescott (1977) considers a monetary policymaker who
faces a trade-off between employment and inflation. Suppose higher-than-expected
inflation lowers real wages and increases labor demand and employment in thiseconomy. Suppose further that, following Barro and Gordon (1983), this monetary
policymaker wants to minimize the objective function that consists of the sums of
the squares of two gaps. The first gap is the gap between the desired unemployment
rate (which is lower than the market clearing equilibrium unemployment rate) andthe actual unemployment rate. The second gap is the gap between the desired inflation
rate (zero in this case) and the actual inflation rate. This monetary policymaker
controls for the inflation rate to minimize the objective function. Ex ante, themonetary policymaker finds it optimal to choose zero inflation. However, once private
agents expect zero inflation, ex post, the monetary policymaker finds it optimal tochoose positive inflation to reduce unemployment by taking advantage of private
agents’ expectations (namely, the ex ante optimal plan is time inconsistent). Since
private agents correctly anticipate the monetary policymaker’s behavior described above,in equilibrium, the inflation rate is positive and there is no additional employment.
The additional inflation rate is called “inflation bias.”
The idea of dynamic inconsistency led to a lot of papers on institutional reforms
that would have improved the performance of discretionary policymaking, including
the establishment of an independent central bank.
Rogoff (1985) demonstrated that a proper balance between credibility (of lowinflation policy) and flexibility (stabilization) could be achieved through delegationof monetary policy to an independent central bank managed by a “conservative”
central banker—i.e., an agent who is more inflation averse than citizens in general.
Better welfare outcomes would then be achieved.
Rogoff ’s (1985) idea has been used in analyses of monetary regimes with explicit
inflation targets and incentive contracts for central bankers. For example, Walsh (1995)
proposes a state-dependent wage contract between a central banker and elected leaders
under the private information of the central bank on supply shock, assuming thatsociety and the central bankers have the same preference. The state-dependent wage
contract resolves inflation bias and achieves the second-best outcome in equilibrium(see also Svensson [1997a] for an extension of this idea).
Criticisms apply to the state-dependent wage contract between a central banker andelected leaders to solving the inflation bias stemming from a dynamic inconsistency
problem. First, one may complain that no central banker has a state-dependent wage
contract as Walsh (1995) proposes. Second, McCallum (1995) criticizes this approachas merely relocating the problem, not solving it. Third, Waller (1995) points out thatthe real problem is that the central bank would like to do the right thing, but the electedleaders have objectives that differ from those of the general public. If the electedleaders are the ones who write the contract, they are unlikely to solve the problem.
Finally, the model does not necessarily explain the causal relationship between inflationand central bank independence. For example, Posen (1993) argues that the observed
relationship between inflation and central bank independence does not reflect a causal
relationship, but simply reflects citizens’ preferences toward inflation.

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The Monetary Policy Committee and the Incentive Problem: A Selective Survey

Rogoff ’s (1985) idea has been also extended in analyses of the term lengths ofcentral bankers based on a partisan model. For example, Waller and Walsh (1996)
assume that the economy consists of numerous sectors that differ in terms of theirpreferred rates of inflation and that the government represents the preference ofmedian voters. They assume that after each election, the government in officeappoints a new central bank head. They show that short-run variability of voter
preference in elections creates excessive volatility of policy if the central banker has ashort term in office. They show that the optimal term length balances the value ofthe marginal reduction in output fluctuation achieved by lengthening the termsof office against the greater expected cost of deviations from the median voter’s
preferred inflation rate. For example, if the median voter’s preference for inflationis constant over time and inflation bias is sufficiently large, society benefits from
appointing a conservative central banker with a long term in office.
B. Benefits of Delegation Based on Long Terms of Office
Maskin and Tirole (2004) compare decision-making powers by accountable officials
subject to election (elected leaders, hereafter) and nonaccountable technocrats(judges, hereafter). They show that policy decision making by nonaccountable judges
is desirable when (1) the elected leader is poorly informed about the optimal plan,(2) acquiring decision-relevant information is costly, and (3) it takes a long time toknow whether the decisions made in the past are correct or not. Maskin and Tirole(2004) argue that the technical decisions may be best allocated to judges or
appointed bureaucrats. In particular, they argue that monetary policy is a special casethat satisfies the three conditions of delegation above. Behind their reasoning, longand variable lags in the transmission of monetary policy are important. Eggertssonand Le Borgne (2004) propose a theory of delegation based on optimal contract
theory similar to the idea of Maskin and Tirole (2004).
Eggertsson and Le Borgne (2004) model two trade-offs of delegation in a representative democracy. The cost of delegation is that the electorate is unable to get rid
of incompetent office holders. If the ability of job candidates cannot be ascertained
perfectly prior to hiring, society may be stuck with a bureaucrat of low ability for along period of time. The benefit of delegation is that the officeholder is provided
with a long-term employment contract, enabling him or her to have a long-termhorizon that may improve performance. In their model, if there is uncertainty about
the ability of the officeholder, a longer employment contract gives the long-term
appointee an incentive to invest more effort into his or her decision making, thereby
increasing the quality of decisions.
Eggertsson and Le Borgne (2004) apply this idea to a stochastic general equilibrium
to provide a theory of central bank independence. The rationale for delegating
monetary policy to an independent central banker is that he or she is given a long-term
job contract; this, in turn, gives the central banker an incentive to put more effort into
the policymaking process than an elected politician would. This extra effort translates,in expectations, into better forecasts and fewer policy mistakes, which increases social
welfare, and the elected leader’s own utility, thereby making delegation incentivecompatible. Delegation becomes more likely to be incentive-compatible to elected47

leaders if the private rent for elected leaders to run monetary policy by themselves is
low and the elected leader’s ability to run monetary policy is low, because they would
thus make bad monetary policy decisions and lose office at the next election. The model
does not rely on the presence of an inflation bias in monetary policy as the reason fordelegation, and thus is free from the critique of McCallum (1995).
C. Reservations
There are at least two reasons why we should not take the discussion in the previous
two subsections literally.
First, I assume that a central bank in the previous two subsections has instrument
independence, but does not have target independence. If a central bank selects goals
to target, such as output, the foreign exchange rate, or asset prices, the incentive
effects of delegation to a central bank might be quite different from the one I
analyzed in the previous two subsections. Moreover, if the multiple goals include onethat is hard to enforce by setting a numerical target, such as stability of the financial
market, the incentive effects of delegation to a central bank might differ, because theachievement of that target could in theory have both positive and negative effects on
price stability. One may argue that the strongest supporter of stable financial markets,
such as pension funds, will exert more pressure for price stability on a central bank.
One may also argue that excessive emphasis on financial stability might delay changes
in the interest rate that would achieve price stability.
Second, the literature reviewed in Section II.A includes the classic papers on
inflation bias. In an era of low inflation, the discussion on deflation bias might also
be useful. For example, Eggertsson (2004) shows that if the government has only one
instrument, namely, open market operations in government bonds, and the naturalrate of interest is temporally negative, there will be excessive deflation if the government
cannot commit to future policy. Deflation bias arises from the central bank’s lack ofcommitment to optimal future policy when faced with negative demand shock andthe lack of a policy instrument.

III. Why Do Legislators Delegate the Conduct of Monetary
Policy to a Committee?
On May 6, 1997, the BOE’s Monetary Policy Committee replaced the previous
system in which a single individual—the Chancellor of the Exchequer—decided
the appropriate level of U.K. base rates. Can economists provide any rationale forthis replacement?
Blinder (1998) argues that decision making by committee, especially with astrong tradition of consensus, makes it very difficult for idiosyncratic views to prevail.
Decisions tend to regress toward the mean, and reinforce other factors, such as
gradualism against model parameter uncertainty, to make central bank decision
making inertial. However, Blinder (1998) conjectured that the additional monetary
policy inertia imparted by group decision making provided a net benefit to society.
Under what circumstances is his conjecture correct?

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The Monetary Policy Committee and the Incentive Problem: A Selective Survey

This section selectively reviews theoretical studies to answer Blinder’s (1998)
conjecture. It reviews three recent theoretical papers on the case for a monetary policy
committee rather than an individual. The papers consider three incentive problems andshow the conditions for decision making by a committee to be better than decision
making by an individual. The first paper considers the relationship between the sizeof the committee and the incentives for individual members of a monetary policy
committee to gain a reputation for being inflation fighters. The second paper considers
the relationship between the number of committee members and an opportunistic
central banker’s incentive to mimic a nonopportunistic central banker. The third paper
considers the relationship between the nomination process of committee members andthe incentive for legislators to choose a particular type of committee member.
Before moving on to those three papers, I touch upon a few earlier works thatsuggest that a monetary policy committee by a group of individuals with staggered
and finite terms of office would help to resolve the inflation bias.
Tabellini (1987) considers an example of staggered three-member boards withnonrenewable three-year terms of office.10 Suppose each member has the same loss
function L on actual inflation rate p and expected inflation rate p e within each year,
defined as L = (1/2)p 2 − a(p − p e ), a > 0. Each member individually wants inflation agiven the expected inflation rate (i.e., inflation bias) under a one-shot game. In thisthree-member committee, the following trigger strategy equilibrium holds: if theactual inflation is not the same as expected inflation, the two younger members will
vote for inflation rate a. Otherwise, the two younger members will vote for small
but arbitrarily close to zero inflation. To see why, note that if p e is zero, the oldest
member always votes for inflation rate a , the middle-aged member is indifferent tothe choice of inflation rate a and zero, and the youngest member votes for an inflation
rate of zero. Thus, small but arbitrarily close to zero inflation is accepted by theyoungest member and the middle-aged member. In this way, staggered three-member
boards can reduce inflation bias so that it is close to zero.11
Cothren (1988) considers a committee by n individuals with staggered and finite
terms of office n (with n as an odd number). He considers a situation in which thecommittee members have incentives to vote for lower inflation, to gain reputations
as inflation fighters for the remainder of their terms of office, even if those terms ofoffice are finite. He shows that under some values for discount rates that make younger
committee members prefer the gains from continuing lower inflation to those fromone-time low inflation minus the discounted cost of subsequent future inflation bias,
younger members will form a majority and inflation bias will disappear.
A. Strategic Behavior, Reputation, and Inflation Smoothing
Sibert (2003) considers a central bank committee with a two-period overlapping
term. The committee consists of one junior and one senior member in each period.
10. Cremer (1986) first proposed that overlapping games could provide a natural theory of long-lived institutions.
His model showed that participation in an organization of infinite duration changed the incentives of agents withfinite lives, and would induce more cooperation than a static model would predict under some assumptions.
11. Waller (1989) considers the result of a three-member monetary policy committee helping to reduce output
variability and inflation bias under the assumption that the committee members are appointed based on thepreference of one of the two ruling political parties, considering who likes surprise inflation and who does not.

49

The type of committee member is either nonopportunistic or opportunistic,
as defined below. The nonopportunistic member always votes for zero inflation.
The opportunistic member wants to use surprise inflation, taking into account apredetermined nominal wage contract.
Sibert (2003) considers a model similar to that of Barro and Gordon (1983). Social
welfare is increasing in unanticipated inflation and decreasing in realized inflation.
In the monetary policy committee, two members vote for the desirable rate of
inflation. Nonopportunistic members always vote for zero inflation. Opportunistic
members vote for either zero inflation or inflation that maximizes social welfare
within a period, given the expected inflation rate. Opportunistic members are either
a hawk with probability  or a dove with probability (1 −  ). If two members
disagree, a compromise inflation rate is implemented.
Sibert (2003) supposes that the type of a committee member is private information, and can only be signaled by his or her voting behavior. If a junior member votes
against inflation in his or her first period in office, the likelihood the public attaches
to the nonopportunistic member rises. The higher this likelihood, the lower the
future expected future inflation, and the higher the expected future welfare. Sibert(2003) assumes that the senior member truthfully announces his or her preferredinflation rate. If he or she is a hawk, the vote is for zero inflation. If he or she is adove, the vote is for inflation.
Under the assumptions discussed so far, an opportunistic junior member may pretend
to be a nonopportunistic central banker in the first period of tenure. The opportunistic
junior member compares the current benefit of causing surprise inflation, given current
expected inflation, and the future benefit of an enhanced reputation for being an
inflation fighter. Sibert (2003) considers whether the junior opportunistic members
have more or less incentive to gain a reputation as nonopportunistic members when
they are part of a group, rather than a single policymaker.
According her analyses, a committee member is less influential than a single
policymaker and has less impact on both current and future inflation. In a committee,
the current cost of voting against inflation is smaller for the member and so is the future
benefit of an increased belief that the member is a hawk (voting against inflation).
The size of the discount rate for the future benefit and the probability of being a hawk,
 , determines the trade-off for a committee member.
If the discount rate for the future period is very small, then the gain from lower
future expected inflation is small. Junior opportunistic dove committee members
are at least as likely to vote for inflation when they are the sole policymaker. On thecontrary, if the probability of being a hawk,  , multiplied by the discount rate issufficiently large, the future is important, and it is easy to gain a reputation for beinga hawk (because a member is likely to be a hawk given a high value of  ), then doves
are at least as likely to vote against inflation when they are the sole policymaker.
The committee with opportunistic members has potentially adverse incentives tocreate unanticipated inflation. But the committee is still beneficial from a welfare pointof view if the compromise inflation rate becomes sufficiently smooth comparedwith the bumpy path of the realized inflation rate under the decision making of asingle policymaker who prefers either zero inflation or surprise inflation.

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The Monetary Policy Committee and the Incentive Problem: A Selective Survey

B. A Committee Reproduces Rogoff ’s (1985) Conservative Central Banker
Mihov and Sibert (2004) add the role of activist monetary policy to offset stochastic
shock to the model of Sibert (2003). They consider whether the committee is more
beneficial than a single policymaker in their model.
The addition of the role of activist monetary policy changes the behavior of an
opportunistic committee member. More specifically, an opportunistic committee
member’s incentive to mimic a nonopportunistic committee member depends on thesize of the current stochastic shock. An opportunistic committee member finds it
relatively attractive to pretend to be a nonopportunistic committee member whenshocks are small. However, an opportunistic committee member finds that the
reputation gain is less likely to be worth not responding to large shocks. Therefore,
an opportunistic member produces an endogenous nonlinear response to shocks
through reputation building.
The committee endogenously produces a strictly positive inflation bias, but produces less inflation on average than a policymaker who maximizes social welfare withina period would select. In this sense, the committee reproduces Rogoff ’s (1985) conservative central banker. Because of the assumption that the welfare cost of inflation isincreasing at an increasing rate, the smoother inflation produced by the committee
is also likely to make a committee more attractive than a single policymaker.12
C. A Committee Reduces Uncertainty from a Partisan Business Cycle
In the previous two subsections, I assume that some committee members want higher
inflation while others do not. Why do committee members disagree about their desired
rate of inflation? Waller (1992a) shows that if there are two sectors that differ in theirwage rigidity, the socially desirable rate of inflation that minimizes the marginal losses
of output variability and reduction in mean inflation, as Rogoff (1985) proposes, may
not be supported by both sectors. The rigid wage sector prefers higher inflation, while
the flexible wage sector prefers lower inflation. Suppose one of the two sectors chooses
a central banker depending on the election outcome. Society will experience either too
low or too high inflation depending on the majority of the ruling party.
Suppose both sectors nominate committee members. Can committee members
achieve a stable rate of inflation under electoral uncertainty? Waller (2000) shows anexample of a committee that consists of a group of politically appointed individuals,
staggered three-member boards with nonrenewable three-year terms of office, with
explicit consideration of the process of political appointment, which achieves a
steady-state rate of inflation despite electoral uncertainty.
Voters elect a president and a legislative body from one of two parties every
period. The results of elections are supposed to be random; however, it is assumed
that the government is perpetually divided (absence of one-party government).
The two parties differ in their desired monetary policy outcome, and there iscomplete party discipline. Both parties maximize their lifetime utilities from themonetary policy choice.
12. Mihov and Sibert (2004) also show that if central bankers’ types are unknown, then for a wide range of parameters
an independent committee achieves higher social welfare than either a zero inflation rule or discretionary policy
conducted by an opportunistic central banker.

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Regarding the structure of the monetary policy committee, the president nominates an individual to serve in the committee. The preference of a nominee regarding
monetary policy is known to everyone. The legislative body must confirm nominations. Every period, only one individual is nominated for each vacancy. If a nominee
is rejected, the seat is vacant until the next period.
In the process of nomination, the confirming party can either accept a candidate
now and policies associated with this person in the future, or reject the candidate,let the remaining two current committee members set the policy, and wait foran acceptable candidate in the next period.13 The nominating party will choose acandidate that the confirming party can accept given the current members. Therefore,in equilibrium, the nominee will never be rejected.
Under the four key assumptions of frequent election (or long board terms), constantelection probabilities, linear utility of parties, and perpetually divided government,
it is possible to have a steady-state rate of inflation in this economy. Despite the factthat there is electoral uncertainty regarding the winner of the election, the structure
and appointment process of the committee eliminates all policy uncertainty andachieves a steady-state rate of inflation.
D. Summary
I find three theoretical arguments in favor of decision making by committee, rather
than by a single policymaker discussed in recent literature. The first argument focuseson the incentives for an opportunistic member to gain a reputation as an inflation
fighter. The second argument focuses on the incentive of an opportunistic committee
member to mimic a nonopportunistic central banker.14 The third argument focuseson the role of a committee that eliminates the effects of electoral uncertainty on
monetary policy through its appointment process.

IV. How Many Committee Members Should theCommittee Have?
Suppose that having a monetary committee, rather than an individual decision
maker, is good for society. The next question is “How many members should we haveon the committee?”
Condorcet’s jury theorem without cost of communication or strategic consideration gives an answer. According to this theorem, in terms of efficient informationacquisition under uncertainty, the optimal size of the committee is infinity. The firstpart of this section reviews the insight of Condorcet’s jury theorem, a theoreticalapplication to the monetary policy committee, and evidence for this argument basedon experimental study.
In practice, most assumptions of Condorcet’s jury theorem are violated. A morepractical question is “How many committee members should the committee have in
13. Waller (1992b) considers a similar appointing process. Chang (2003) examines the political influence throughappointment on the U.S. Federal Reserve.
14. My focus in this subsection is on literature that presumes the delegation to a central bank discussed in Section II.

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The Monetary Policy Committee and the Incentive Problem: A Selective Survey

order to improve its decision making, if some assumptions of Condorcet’s jury
theorem are violated?” The second part of this section reviews models that relax someof the assumptions of the theorem. The models suggest that it appears very difficult
to give a practical answer to the question above at this stage.
In the future, the literature based on Condorcet’s jury theorem may be a good basis
for consideration of the optimal size of the monetary policy committee. A jury’s binary
decision based on available evidence is similar to the decision made by monetary
policy committee members in setting interest rates.
A. Insight from Condorcet’s Jury Theorem
Gerling et al. (2003) summarize the Condorcet jury theorem and the literature toextend the idea of the theorem to consider the optimal size of a committee.15
Suppose that (1) each individual is equally skilled and this skill, expressed as aprobability of making a correct decision, should be larger than 0.5; (2) individuals
always reveal their signal about the state of the world; (3) individuals obtain theirsignal at zero cost; (4) all individuals have the same objective (namely, to make acorrect decision); and (5) individuals do not exchange views before voting.
Under those five assumptions, the Condorcet jury theorem tells us two things.
First, increasing the number of informed committee members raises the probabilityof reaching an appropriate decision. Second, the probability of making the appropriate decision will converge to one as member numbers increase. In other words, if
assumptions (1) to (5) are satisfied, the optimum number of monetary committee
members is infinity.
1. Application to a monetary policy committee
Gerlach-Kristen (2003a) extends the idea of Condorcet’s jury theorem to the case fora monetary policy committee. She considers a backward-looking model of Svensson(1997b), and derives a linear reaction function that depends on inflation and theoutput gap. She supposes that the estimates of potential output gaps differ fromcommittee member to committee member, and that the true potential output follows
a random-walk process.
She considers the case where the committee members are equally skilled inassessing a potential output gap assuming that their observation errors are serially
uncorrelated and normally distributed with a mean of zero and the same variance but
are uncorrelated between members. If the committee members know the true value ofthe current shock to the potential output and the true value of the potential output,
the committee member should react to the current shock immediately. The desirable
policy response to the shock in her setup is to set the nominal interest rate at theweighted average of current inflation and the current output gap, which is thegeometric average of past shocks to the output gap. Thus, under perfect information,
the interest rate should be changed immediately after the observation of the current
shock to the potential output. Under partial information on the value of the potential
output, the committee members only know the shift in the potential output gradually.

15. See Piketty (1999) for a review of application of the Condorcet jury theorem to political institutions.

53

The committee members change interest rates slowly, as compared with the situation
with perfect information on the shocks to the output.
In her setup, since an optimal decision rule for a monetary policy committee
attaches less weight than a single policymaker to past observations of potential output,
the committee, on average, makes good forecasts on the value of the potential output,
and sets the interest rate closer to the interest rate chosen under the perfect information case. More precise estimates of the random-walk shock to the current output
gap and more weight to the current output gap contribute to more frequent changes
in interest rates, and the interest rates set by a committee are less smooth. In otherwords, uncertainty is reduced and interest rates move more quickly with a committee.16
Thus, in her setup, the optimal number of committee members is infinity.
2. Evidence from an experiment
Lombardelli, Talbot, and Proudman (2002) conducted an experiment with students
from the London School of Economics. The experiment showed that committee
decisions were superior to those of individuals because the process of majority
voting stripped out the effect of bad play, which is consistent with the Condorcet
jury theorem.
In their experiments, participants attempt to “control” a simple two-equation
model: a Phillips curve and an IS curve. The two-equation model is subject torandomly generated shocks in each period, as well as a structural shock that occurredat some point during the experiment.
Participants control the model by choosing the path for the short-term interest
rate after observing the response of the endogenous variables—output and inflation—in the previous period. Participants receive a clear mandate at the beginning of theexperiment: their objective is to maximize a score function that penalized deviationsof output and inflation from their target values. The participants know that at the endof the game they will be paid in pounds according to the following formula:
Payoff = 10 + average score/10,
where the score is averaged over the 16 rounds of the game.
The participants do not know with certainty the exact structure of the economy
they are attempting to analyze. The only information given to participants about themodel is that it is linear and broadly characterizes the structure of the U.K. economy.
They are also told that the economy was subject to random shocks in each period,
and that a structural change occurs at some point during each game. The challenge
for players is to extract the signal from the noise and change their behavior accordingly
to maximize their score.17

16. The result here is robust to the changes to average voting under the assumption that the ability of all members
is equal.
17. At the beginning of the experiment, participants filled in a questionnaire that attempted to reveal these priorbeliefs. Asking participants to fill in the questionnaire again at the end indicated how much they had learned
about the underlying model during the experiment. The questionnaire was designed so that answers could bedirectly compared with the parameters of the model and the coefficients of the optimal rule. Blinder and Morgan(2000) do not uncover prior beliefs by questionnaire.

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The Monetary Policy Committee and the Incentive Problem: A Selective Survey

During the experiments, the participants maximize a “score” in two setups. In thefirst setup, participants decide on the appropriate level for the interest rate after
observing the initial values of inflation and output with a one-period lag individually.
In the second setup, the participants do the same thing by committee. Participants
observe the median vote of the group (as a proxy for a majority-voting rule) as well as
the response to it of output and inflation.
The experiment provided two results in favor of decision making by committee.
First, the decisions made by committees were superior to those of a single individual.
Second, the committee’s performance was, on average, better than the performanceof the best individual.
B. General Case
There are many criticisms of the five assumptions of the Condorcet jury theorem:(1) each individual is equally skilled and this skill, expressed as the probability ofmaking a correct decision, should be larger than 0.5; (2) individuals always reveal
their signal about the state of the world; (3) individuals obtain their signal at zero
cost; (4) all individuals have the same objective; and (5) individuals do not exchange
views before voting. Below, I provide a few examples to demonstrate that some of thefive assumptions do not hold.
1. Strategic interaction
Austin-Smith and Banks (1996) point out that behind assumption (2) of theCondorcet jury theorem, two important assumptions about voting behaviors exist.
First, a committee member votes “sincerely,” in the sense that each committee member selects the same alternative that he or she would have selected when voting alone.
Second, a committee member votes “informatively,” in the sense that each member’s
decision reflects a signal that only he or she received.
Austin-Smith and Banks (1996) show an example in which, if some committee
members vote “sincerely” and “informatively,” the rest of committee members might
not find it optimal to vote “sincerely” and “informatively.” In particular, if the rest of
the committee members vote “rationally,” in the sense that a member’s voting rule
constitutes a Nash equilibrium,18 the member might ignore his or her own information(not vote informatively) and might not reveal his or her signal about the true state of
the world (not vote sincerely).
The rest of the committee members do not vote “sincerely” or “informatively”
because they vote based not only on private signals but also on inferences about othermembers’ private information. Therefore, even if all members share the same preference for the policy decision, the rest of the committee members do not vote inexactly the same manner as they do individually.
Austin-Smith and Banks (1996) show the following example. Consider a committee that consists of three individuals: members 1, 2, and 3. They make a decision
about two alternatives in two states of nature. They have the same preferences(payoffs) and signals discussed below. Regarding their payoffs: in state A (say, good
economic conditions), if they choose alternative A (say, higher interest rates), their
18. By a voting rule that constitutes a Nash equilibrium, I mean that given every other member’s rule, each member
votes to maximize his or her own expected payoff.

55

payoff is 1, and if they choose alternative B (say, lower interest rates), their payoff is
0. In state B (say, bad economic conditions), if they choose alternative B (say, lower
interest rates), their payoff is 1, and their payoff is 0 if they choose alternative A.
Regarding individuals’ private signals, if the true state is A, they are likely to receive
signal 0. If the true state is B, they are likely to receive signal 1. The decision is taken
by majority vote without abstentions.
Two assumptions mean that “sincere” voting does not constitute a Nash equilibrium in this committee. First, suppose that “sincere” voting is “informative” in that if
on receiving a signal of 0 (or 1), an individual thinks A (B) is the true state. Second,
suppose that all members have a sufficiently strong common prior belief that the true
state is A, and members believe that the true state is B only if all their available
evidence suggests that all three members receive signal 1.
Below, I show that if members 1 and 2 vote sincerely, a rational member 3 will not
vote sincerely. To see this point, consider this. Given sincere voting by members 1 and
2, member 3 faces three possibilities: (1) members 1 and 2 receive signal 1 and votefor B; (2) members 1 and 2 receive signal 0 and vote for A; or (3) members 1 and 2
receive different signals. In cases (1) and (2), the vote of member 3 does not change
the outcome. In case (3), the vote of member 3 is pivotal in a sense that the vote doeschange his or her (and the committee’s) payoff. However, because of the assumption ofcommon prior belief of the true state A, if the vote of member 3 is pivotal, not every
member receives signal 1. Given this prior belief regarding other members’ private
signals, irrespective of the value of the signal that member 3 receives, member 3 should
vote for A to maximize his or her payoff and should not vote sincerely. In other words,
member 3 should use his or her inference about other individuals’ private signals to
make a decision and should not use private information.
The example of Austin-Smith and Banks (1996) shows that a prediction of theCondorcet jury theorem, that the optimum number of monetary committee members
is infinity, should not be taken literally because strategic interaction between themembers exists. We should use a game-theory model to deal with strategic interaction
between members.19
2. Free rider problem
Regarding assumption (3) of the Condorcet jury theorem, Gerling et al. (2003) pointout that when information becomes a public good, committee members will lose the
incentive to collect information. Mukhopadhaya (2003) shows an example where thelarger jury panel brings about the free rider problem discussed by Gerling et al.
(2003). In a larger jury panel, each juror has less incentive to pay attention in court if
the jury needs to pay a fixed cost to pay attention, even though they are all pledged
to listen and deliver a verdict. Hence, a juror’s information does depend on the size
19. In this paper, I focus on a simple majority rule. However, strategic interaction among members requires serious
study to compare the performance of different voting rules. For example, Feddersen and Pesendorfer (1999) givethe following example: members 1 and 2 vote sincerely and a rational member, 3, does not vote sincerely, voting
under a unanimous voting rule, whereas sincere voting is consistent with majority rule. This example showsthat the failure of policy recommendation based on a version of the Condorcet jury theorem, which suggests
that, given the size of the jury, requiring a super-majority to convict the defendant will reduce the probability ofconvicting an innocent individual. The model supports the requirement for unanimous jury verdicts as a rulethat minimizes the probability of convicting innocent defendants, although Feddersen and Pesendorfer (1999)
show that such a policy recommendation is not robust with the inclusion of strategic voting.

56 MONETARY AND ECONOMIC STUDIES (SPECIAL EDITION)/OCTOBER 2005

The Monetary Policy Committee and the Incentive Problem: A Selective Surveyof the jury. Because of the free rider problem, a larger jury panel may actually makepoorer decisions.
Mukhopadhaya (2003) motivates his example based on a recent debate on the
optimal size of the U.S. jury. Some argue that six-person juries are inferior to 12-person
juries based on the Condorcet jury theorem. This debate might have relevance tothe discussion on the composition of the U.S. FOMC. For example, Goodfriend(1999) points out that the great strength of the policy made by representatives from asystem of regional banks is the diversity and number of viewpoints brought to thetable; however, the size of the FOMC creates the free rider problem discussed above.
Recognizing that their influence in the committee may be small, the FOMC members
may be inclined to “free ride” on the preparation of others, such as the chairman orboard staff.
3. A case where assumptions (2), (3), and (5) do not holdIn addition to the points made in the previous two subsections showing that assumptions (2) and (3) do not hold in practice, it is quite natural that the members ofa monetary policy committee exchange views before voting. Thus, it is quite likelythat assumption (5), in addition to assumptions (2) and (3) of the Condorcet jury
theorem, does not hold in practice.20 However, in a monetary policy committee, allindividuals may share the same objective function, or at least they want to make acorrect decision to achieve price stability. Thus, assumption (4) of the Condorcet jury
theorem seems to be innocuous.
Gerardi and Yariv (2003) provide a model, in which assumptions (2), (3), and(5) do not hold. Hence, their model seems to be a reasonable example of an incentive
problem in a monetary policy committee.
They consider the following situation. First, there are two states of the world,
G (good) and B (bad), with prior distribution of probability P(G) and P(B). The
committee member, chosen from an infinite pool of identical agents, will choose
either H (raise the interest rate) or L (reduce the interest rate). An agent’s utility
depends on the committee’s choice and the state of the world. The agent’s utility iszero when the committee chooses H in state G, and when the committee chooses
L in state B. Let q be a number between zero and one. Agent utility is −q if thecommittee chooses L in state G. Agent utility is −(1 − q ) if the committee chooses
H in state B.
Each agent can purchase a signal of the states of the world, either G or B, with anaccuracy of p > 0.5 with a cost of c.
Committee members are chosen from the agents. The committee will vote forthe decision. The committee members can communicate before the voting. But
the committee members may not truthfully reveal their voting decision during thecommunication period.
A social planner who has the same preferences as agents will solve the following
problem. First, the planner chooses an extended mechanism consisting of the sizeof the committee, the voting rule, and how the committee members can exchange
information before voting. Second, a committee member will decide to purchase
20. Regarding the effects of dropping assumption (5), Gerlach-Kristen (2003b) models the benefits of deliberation in
the committee.

57

information or not. Third, the committee members communicate with each other,
without knowing whether the others purchase information or not, and then vote.
In this institutional setup as explained above, agents do not necessarily reveal theirpreference correctly. Agents want to “free ride” on others’ information during thecommunication stage, because purchasing information is costly. Agents want toobtain information from others through their communication before voting.
Gerardi and Yariv (2003) prove the possibility of a mechanism where all committee members collect information and report their signals truthfully and all committee
members are symmetric in a sense that the probability that a member decides L depends
only on the number of signals but not on the identity of the members who send
signals (i.e., the committee members are anonymous). Namely, they prove that social
planners solve a mechanism that maximizes the expected utility of agents by the choiceof a mapping probability of choosing L when they obtain a signal of the economy,
subject to the constraint that members will invest to buy information, and members
will report their decision truthfully. Such mechanisms depend on the number ofcommittee members. The social planner will choose the number of members that
achieves the highest expected utility among such mechanisms.
Their comparative statistics show that (1) the highest expected utility of thesocial planner achieved among such mechanisms is decreasing in the information costc, but the effects of c on the committee size are not clear; (2) the highest expectedutility of the social planner achieved among such mechanisms is increasing in theinformation accuracy p, but the committee size is not a monotone function of p ;and (3) if P(G) is smaller than q, their simple example shows that the committee
size is decreasing in q. If P(G) is about 0.5 and if the loss of choosing L in state G(choosing too loose a monetary policy under good economic conditions) is small,as is often the case for “insurance” arguments for low interest rates, it is better to havea small committee.
4. Reservations
There are at least two reasons why we should not take these conclusions literally.
First, I assume that the skills of voting members are equal and that all members
meet and exchange their views freely. In practice, monetary policy decisions are
sometimes taken by a “hub-and-spokes” committee, and my assumptions may not becorrect. The U.S. FOMC consists of the members of the Board of Governors (hub)as well as the presidents of the Federal Reserve Banks (spokes). The Governing
Council of the ECB includes members of the Executive Board of the ECB (hub) as
well as governors of all euro area national central banks (spokes). One may wonder if
the members from the hub are more informed by the staff members at the hub thanthe members from the spokes. One may also wonder if the members from the hubs
have more chances for discussions than do the members from the spokes. I do notinvestigate the issues related to “hub-and-spokes” committees.21
Second, I assume that all committee members share the same price stability mandate.
In practice, regional considerations, in addition to union-wide considerations, might
21. Berk and Bierut (2004) focus on the majority voting rule and the fact that skills of members are heterogeneous.
They prove that they can replicate the optimal monetary policy outcome using a suboptimal voting rule, byinstitutional adjustment of the monetary policy committee.

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The Monetary Policy Committee and the Incentive Problem: A Selective Survey

be important in some monetary unions.22 I do not discuss the optimal member size
and weight of regional representation in the monetary policy committee.23 I do notdiscuss the effects of political business cycles in monetary union economies on theunion monetary policy.24
C. Summary
The Condorcet jury theorem suggests that a larger committee will make gooddecisions. This policy recommendation depends on many assumptions, and theprediction may not be robust in practice.
First, the recommendation assumes that a committee member will vote based
only on private signals. However, strategic considerations lead to a situation wherecommittee members will also vote based on inferences about other members’ private
information. Therefore, even if all members share the same preference for a policy
decision, the rest of the committee members do not vote in exactly the same manneras they would individually; thus, the Condorcet results may fail.
Second, the recommendation depends on the assumption that the private information is free. However, in practice, the committee members may not obtain signals
relevant to their decision at zero cost. In particular, they may manipulate their views
before voting to “free ride” on other members’ costly information, thus the Condorcet
results may fail.
Third, the recommendation depends on the assumption that the members do notexchange views before voting. Removing the three assumptions simultaneously, amechanism that maximizes the expected utility of agents subject to the constraintthat all committee members will invest to buy information, report their decisions
truthfully, and can communicate before the voting depends on the number of committee members. Several key parameters, such as, in particular, the cost of acquiring
information, or the relative probability of good economic conditions, and the loss
accompanying the choice of loose monetary policy under good economic conditions,affect the committee size.
The model suggests that the optimal committee size weighs the benefit ofdiversity of views in a larger committee against the risk of free-riding due to the costof obtaining relevant information in a larger committee. Although it is very difficult
for us to obtain reasonable empirical estimates of these key parameters, the models
here suggest that the committee size cannot be infinity, and that the size can differ
depending on the relative estimates of these key parameters. Indeed, the revealed
preference of many economies regarding the size of the committee is not a large
number such as 20 or 30, but usually at most 10, as Table 1 shows.25
22. See Meade and Sheets (2002) for evidence that the U.S. Federal Reserve policymakers do take into accountdevelopments in regional unemployment when deciding monetary policy.
23. Hefeker (2003) theoretically compares the choice of three regimes: monetary policy by regional representatives,monetary policy by a board appointed by the central government only, and a council in which board members
and regional representatives jointly determine the monetary policy.
24. Von Hagen and Süppel (1994) show that dominance of regional interest that considers the inflation and unemployment trade-off as a primary target, rather than union-wide interests that stabilize union-wide unemployment
and inflation, will lead to inefficient monetary policy stabilization policy in a multicountry Barro and Gordon(1983) model.
25. Table 5 of Lybek and Morris (2004) also shows that most policy boards have seven to nine members based on
their survey of 101 central bank laws.

59

V. Voting Transparency in the Committee
Suppose that having a monetary committee (without knowing the optimal size), rather
than individual decision making, is good for society. Our next question relates to theempirical observation that the way to disclose the decision making in the monetary
policy committee varies from central bank to central bank. I focus on a topic that is
the subject of many research papers: the pros and cons of the disclosure of voting
records in detail. Regarding the pros and cons of the disclosure of voting records
and the minutes of policy board meetings, Buiter (1999) and Issing (1999) express
strikingly different views.26
In this section, I discuss various incentive problems for outside interest groups,
legislators, and central bank monetary policy committee members arising from thechoice of open voting or secret voting. Note that I discuss the issue of voting transparency in a monetary policy committee. The issues of transparency in a monetary
policy committee may not always apply to a monetary policy run by an individual.
The results in this section should not be taken as a general policy recommendation
for central banks.
A. The Case for Open Voting: Different Preference and Reelection
Gersbach and Hahn (2004) favor open voting when the government must choose
committee members from a pool of candidates whose preferences regarding stabilization might differ from those of the government, because the government cannot
tell the preferences of candidates before appointment.
Consider a two-period model where the government can reelect or dismiss committee members after the first period. Consider two types of committee member, one
which has the same preference as the public (type A), and the other having a different
preference (type B). In the first period, n members constitute the committee, andwith some probability members are type A, but the true type of member is private
information. The committee members will vote and set interest rates. In the second
period, the government reelects committee members and replaces some members.27
Under open voting, the government will dismiss committee members who do
not vote for a socially desirable interest rate. Under secret voting, the government
must either accept all committee members if the committee chooses the sociallydesirable interest rate, or the government must dismiss all committee members if thegovernment observes socially undesirable interest rates.
Regarding the voting strategy of members in the second period, all members will
choose their preferred interest rate because the second period is their last term of office.
Regarding the voting strategy of members in the first period, type A members will
vote for the socially desired rate, but type B members might mimic type A members
to get reelected.
26. We do not discuss why majority voting is better than decision making by consensus. We also presume simple
majority voting in this section. See Ben-Yashar and Nitzan (1997) on the optimal group decision rule in a
fixed-size committee.
27. To be consistent with the idea of central bank independence, I interpret one period in this model as a long
period of time.

60 MONETARY AND ECONOMIC STUDIES (SPECIAL EDITION)/OCTOBER 2005

The Monetary Policy Committee and the Incentive Problem: A Selective Survey

The cost of mimicking a type A member for a type B member is that a monetary
policy is chosen in the first period, which type B members do not want. The benefit ofmimicking the type A member for the type B member is that he or she will be reelected
and will vote for his or her preferred monetary policy in the second period.
Given the government’s reelection strategy, Gersbach and Hahn (2004) show thatthe cost of mimicking a type A member is higher than the benefit. In equilibrium, boththe type A member and the type B member will vote truthfully. Knowing that
all members truthfully reveal their type, it makes sense to select open voting, since
the government dismisses type B committee members only under open voting, while
under secret voting the government must dismiss all members, including type A.
A prediction from Gersbach and Hahn (2004) is that a central bank whose preferences are the same as the public prefers transparency, while a central bank whose
preferences differ from the public prefers opacity. Note that Gersbach and Hahn
(2004) suppose that the government chooses central bankers whose preferences
differ from society’s as committee members because there is some uncertainty about thepreferences of candidates before appointment. In Rogoff (1985), it is a good thing
to delegate monetary policy to a conservative central banker whose preference differsfrom society’s, while in Gersbach and Hahn (2004) it is a good thing to expel suchmembers from the committee.
B. The Case for Open Voting: The Information Value of Voting Records
Buiter (1999) stresses the importance of disclosing voting records. An interesting
empirical question is whether the disclosure of voting records conveys any useful
information to the market participants in a sense that the disclosure increases thetransparency of monetary policy. Gerlach-Kristen (2004) gives an interesting answer,
that the voting records of the BOE’s Monetary Policy Committee help in predicting
future policy rate changes, and thus improve the transparency of monetary policy.28
I take her results as support for the disclosure of voting records of the U.K. Monetary
Policy Committee throughout the period studied.
In the United Kingdom, the Monetary Policy Committee has nine members andmeets monthly to decide on the level of the repo rate. Policy decisions are taken bymajority vote and are announced the same day. Gerlach-Kristen (2004) defines thevariable called “skew,” which is a measure of the difference between the averagerate proposed by individual members and the policy rate decided upon by majority
voting, to measure the degree of disagreement on the level of the U.K. repo rate.29
28. I take the analysis of Gerlach-Kristen (2004) just as an example. Other methods might work to infer the information contained in the variable “skew” for other central banks. For example, Chappell, McGregor, andVermilyea (2005) analyze the voting patterns of FOMC members with an econometric model and test a numberof hypotheses such as the median voter hypothesis or the influence of the chairperson. See also section 3.5
of Chappell, McGregor, and Vermilyea (2005) for a survey of the economic analysis of the U.S. FOMC
voting record.
29. Starting with the first Monetary Policy Committee meeting, minutes of the discussions preceding the policy
decision have been published. These minutes also include the voting record, the publication of which is intended
to improve the accountability of the committee members. From June 1997 to October 1998, the voting record
indicated whether those committee members who disagreed with the majority favored a tighter or looser policy,
but it did not reveal which interest rates they voted for. In this period, the minutes, moreover, were released only
after the following meeting. Since November 1998, the voting record has contained the interest rates proposedby dissenting members, and has been published two weeks after the meeting.

61

In the case of the BOE’s Monetary Policy Committee, disagreement was common
between June 1997 and February 2003. There were 70 meetings, and only in 22 ofthem was the interest rate decision taken unanimously.
Given those disagreements, “skew” must be volatile. I reproduce “skew,” themajority interest rate, and the average voting rate in Figure 1.
To study the relationship between “skew” and future interest rate changes,
Gerlach-Kristen (2004) specifies the date of the interest rate decision as t − 1, and thedate of the vote publication (in practice, two weeks later) as t. Since policy is adopted
every four weeks, the next policy rate decision in this framework is announced attime t + 1. The change of the policy interest rate is measured as the change betweent + 1 and t − 1, and we denote this monthly change as i t +1.
The regression that assesses whether skewt predicts policy rate changes takes
the form
i t +1 = a 1*skewt + a 2*i t −1 + et +1,

Figure 1 The U.K. Repo Rate and “Skew”

Percent

Percent
0.25

8
7

Average rate (real-time data, left scale)
Policy rate (left scale)“Skew” (right scale)

0.20

6

0.15

5

0.10

4

0.05

3

0.00

2

–0.05

1

September 18,
2001

0

–0.10

1997/ 6/ 6
8/ 7
10/ 9
12/ 4
1998/ 2/ 5
4/ 9
6/ 4
8/ 6
10/ 8
12/10
1999/ 2/ 4
4/ 8
6/10
8/ 5
10/ 7
12/ 9
2000/ 2/10
4/ 6
6/ 7
8/ 3
10/ 5
12/ 7
2001/ 2/ 8
4/ 5
6/ 6
8/ 2
9/18
11/ 7
2002/ 1/10
3/ 7
5/ 9
7/ 4
9/ 5
11/ 7
2003/ 1/ 9
3/ 6
5/ 8
7/10
9/ 4
11/ 6
2004/ 1/ 8
3/ 4
5/ 6
7/ 8
9/ 9

–0.15

Note: “Skew” is the gap between the repo rate (policy rate chosen by the majority)and the average voting rate. In computing the average rate, I assume that
dissents before November 1998 deviated by 25 basis points from the majority
view, following Gerlach-Kristen (2004). We need this assumption because
preferred percentage decreases or decreases proposed by minority voters
are not reported in the dataset disclosed by the BOE, titled “Voting by the
Monetary Policy Committee—1997 to Present Date,” downloaded from the
BOE website (http://www.bankofengland.co.uk/monetarypolicy/mpcvoting.xls).

62 MONETARY AND ECONOMIC STUDIES (SPECIAL EDITION)/OCTOBER 2005

The Monetary Policy Committee and the Incentive Problem: A Selective Survey

where et +1 is white noise. The lagged policy rate change is included to account for
the autocorrelation in interest rate changes. Gerlach-Kristen (2004) uses data from
June 1997 to January 2003 and November 1998 to January 2003, and runs anordered probit model regressing future policy changes on “skew” and the past interest
rate change.
She then finds that “skew” is informative for forecasting the future policy change.
The probability of no interest rate change in that period is about 80 percent.
Nonetheless, a repo rate cut is more likely than an increase if we observe a negative“skew,” where some Monetary Policy Committee members favor a lower interest rate
than do the majority.
Her finding of statistically significant effects of “skew” on the future policy rate is
robust even if she adds the slope of the term structure, which is another indicator ofmarket participants’ future inflation expectation. Her finding of statistically significant effects of “skew” is also robust even when she regresses the change of a market
interest rate between the day before the announcement of the voting record and the
day after on the variable “skew.”30
C. The Case for Secret Voting: Political Interest Groups
It is true that some committees disclose both decision and voting records, like the
BOJ Policy Board, parliaments, or juries in sports (for example, ice skating or
synchronized swimming). However, some committees only announce their decision,
such as the ECB Governing Council, juries in courts, or school admission committees.
Why do some committees prefer secret voting, while others do not?
Issing (1999) favors secret voting on the ground that legislators and interest
groups will put pressure on some committee members to see if their pressure resultsin their preferred outcome. Felgenhauer and Grüner (2003) elaborate the effects fromoutside interest groups stressed by Issing (1999) in detail. They argue that if an external interest group attempts to influence committee decisions, it makes sense to havesecret voting committees. The logic is that restricting access to information obtained
from the decision-making process by interest groups may reduce the bias towardspecial interest policy.31

30. Contrary to the findings of Gerlach-Kristen (2004), Meade (2002) shows that the difference between the mean
and median FOMC members’ preferred interest rates does not help to predict future interest rates. However,it does help to predict policy bias.
31. The influences of interest groups have been quite common in the history of central banks other than the ECB.
For example, in the United States, a famous example of pressure from an interest group was a demand fromPresident Harry Truman and the U.S. Treasury to peg interest rates. The FOMC met with President Trumanlate in the afternoon of Wednesday, January 31, 1951. According to Hetzel and Leach (2001), Truman began bystating that “the present emergency is the greatest this country has ever faced, including the two World Wars
and all the preceding wars . . . . [W]e must combat Communist influence on many fronts . . . . [ I]f the people
lose confidence in Government securities all we hope to gain from our military mobilization, and war if needbe, might be jeopardized.” At the meeting, FOMC members had made no commitment to the President.
Nonetheless, the next morning, the White House press secretary issued a statement that “The Federal Reserve
Board has pledged its support to President Truman to maintain the stability of Government securities as long as
the emergency lasts.” The Treasury then issued a statement saying that the White House announcement “means
the market for Government securities will be stabilized at present levels and that these levels will be maintained
during the present emergency.”

63

Felgenhauer and Grüner (2003) suppose that the economic condition is either
good or bad, with a probability of 0.5. Committee members have private signals
regarding the future economic conditions, and they want to serve the public’s interestby truthfully reporting their private signals.
Suppose that some committee members are subject to external influences from aninterest group. An interest group offers side payments to the committee members to influence their voting. Suppose the members receive money if they vote in favor of policy
biased toward this interest group. Members’ utility depends on their view of economic
conditions, plus the side payment from the interest group. Members’ utility is high when
they correctly report their private signal on economic conditions. Members’ utility isalso high if they get a side payment. The interest group wants members to vote in one
particular way irrespective of the economic conditions implied by the committee members’ private information. Thus, the interest group is willing to make side payments tothe committee members, even though such payments reduce the interest group’s utility.
The game is as follows: an interest group commits side payments, the committee
gets signals on the state of the economy with some probability of error, and members
decide on policy based on majority vote. Society cannot know whether the committee
made the right decision, because society cannot verify the true state of the economy fromthe members’ private information. Hence, society cannot punish the committee members.
Suppose there are two types of committees, each consisting of three members.
The first type of committee announces not only the decision, but also the individual
voting record and the results of majority voting. The second type of committee
decides and tells only the outcome based on majority secret voting.
In the first committee, the cost of biased voting arises if an individual vote ispivotal (note that without payment, all members will choose socially desirable
policy).32 The biased voting reduces the probability of correct decisions being made.
If the probability of a vote becoming pivotal is small, the cost of biased voting issmall. However, the benefit of getting money is certain, because a member’s voting
record is disclosed even though his or her vote is not pivotal. Thus, it is possible that
all committee members vote in favor of the biased policy.
In the second committee, members get money only if their vote is pivotal and indeed
the committee makes the biased decision. Thus, the price of an insincere vote is higher.
According to this analysis, the secret voting is not worse than the open voting in
the relevant range of the correctness of committee members’ private information on
the economic situation, and in the relevant range of the degree of bias made by theinterest group.33
D. The Case for Secret Voting: Different Abilities and Reelection
Gersbach and Hahn (2001) favor secret voting if committee members differ withrespect to competence concerning future developments in the economy, and if
committee members derive large private benefits from holding office.
32. See the definition of “pivotal” in the example discussed in Section IV.B.1.
33. Note that secret voting is not the only way to prevent side payments by interest groups. Felgenhauer and Grüner(2003) show that communication among committee members before voting may severely limit an interest
group’s ability to pay money contingent on biased voting.

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The Monetary Policy Committee and the Incentive Problem: A Selective Survey

Gersbach and Hahn (2001) consider a two-period economy where a central
bank sets interest rates based on majority voting of committee members. They
suppose that committee members want to be reelected, but their abilities are notuniform. Some committee members are good at forecasting the future developmentsin the economy.
Note that Gersbach and Hahn (2001) focus on the situation where the committee
members have common preferences but different forecasting abilities, and thus themembers may vote differently. Gersbach and Hahn (2004), discussed in Section V.A,
focus on the opposite situation, where the committee members have common
forecasting abilities but different preferences for stabilization policy, and thus themembers vote differently. The two papers employ a similar setup, but differ on thereasons why the committee members have different opinions.
I summarize below government and committee member actions in the first period
and in the second period. In the first period, n members constitute the committee,
and with some probability each member is good at forecasting future developmentsin the economy, but the type of member is private information. The public forms
an expectation of inflation but does not observe the magnitude of the shock. Good
committee members observe a shock signal, and with probability p (p > 0.5),
good committee members correctly identify the magnitude of the shock, and withprobability 1 − p, they identify the magnitude of the shock incorrectly. Other
committee members correctly identify the magnitude of the shock with probability 0.5.
All members will vote for their preferred interest rate, and set the interest rate. All
members are allowed to abstain. Shocks are revealed, and inflation and output are
determined. In the second period, the government reelects committee members,
and replaces some members (from the same pool), inflation expectations emerge,
good members observe the signal, members vote (but may abstain), and inflationand output are determined. Gersbach and Hahn (2001) assume that the shock takes
only two values, say, “low” or “high,” and thus socially desirable interest rates takeonly two values, either “high” or “low.”
Under such a framework, we can show that the following government’s reelection
strategies, chosen under open voting and under secret voting, constitute equilibrium
reelection strategies. Under open voting, the government dismisses committee members who do not vote for socially desirable interest rates, given shocks. Under secretvoting, the government must either accept all committee members (if the medianvoter is socially desirable) or dismiss all committee members if the government
observes socially undesirable interest rates.
The government strategy discussed in the previous paragraph is an equilibrium
strategy in secret voting because, if the committee performs well, it must be better
than the average social pool. Thus, all members should remain even though some ofthem are not good members. In open voting, again, the government strategy is anequilibrium strategy.
Given this government reelection strategy, under secret voting, good members
will vote for either high or low interest rates depending on the information on theshock in both periods. The less able members will not vote, because their voting will
only exacerbate the results of monetary policy and reduce their chance of getting65reelected. If there is no good member, the committee will randomize the two possible
interest rates.
Under open voting, in the first period, good members will vote for either high or
low interest rates depending on information on the shock. The less able members
will vote. If a member does not vote, it reveals that he or she is not a good member
and thus will be fired at the end of the first period. The best the less able members
can do in the first period is to randomize the two possible interest rates, and expect a
50 percent chance of not being fired. In equilibrium, in the first period, the strategic
vote by less able members makes open voting worse than secret voting because lessable members, on average, make inferior decisions.
Under open voting, in the second period, good members will vote for either
high or low interest rates depending on information on the shock, and the less able
members will not vote. However, under open voting, the average probability of
selecting good committee members is higher in the open voting than in the secretvoting, and the expected loss in the second period is lower for open voting.
Given the opposite effects of secret voting in the first period and in the second
period, Gersbach and Hahn (2001) conducted simulations to check which effectdominates in equilibrium. According to their simulations, the benefit of secret votingin the first period dominates the loss of secret voting in the second period.
E. Reservations
There are at least two reasons why we should not take these conclusions literally.
First, the publication of voting records is not the only way to release the central
bank’s intention for the future course of monetary policy.34 We should be careful
about the combination with other information disclosed by a central bank, such as
the disclosure of minutes, as we will elaborate in the next section.35
Second, the models discussed in this section assume that the voting powers of
all members are equal. However, in practice, a member on the committee, perhaps
the chairperson, might be influential compared with other members (Blinder [1998,
p. 21]). For example, if the monetary policy committee includes full-time internal
members and part-time external members, members’ degrees of information andexpertise may not be the same.36 In such a situation, people will have no problem
with a good central bank run by a chairperson alone if he or she is good. However,such an institutional setup, heavily relying on a particular person, may be risky.

34. For example, Geraats (2005) examines the reputational incentives related to transparency, focusing on the publication of central bank forecasts of economic shocks, which are only observable by a central bank. However, heranalysis assumes that a central bank, rather than a central bank committee, controls monetary policy.
35. In inflation-targeting economies, the relationship between the dates of publication of the inflation report and themeeting and decisions of the monetary policy committee do not coincide (Fracasso, Genberg, and Wyplosz[2003, p. 8]). In the United States, the FOMC decided to expedite the release of its minutes on December 14,
2004. Before December 14, 2004, the minutes of each meeting were made available on the Thursday after the
next regularly scheduled meeting. After December 14, 2004, the minutes of regularly scheduled meetings werereleased three weeks after the date of the policy decision.
36. In the United Kingdom, the Monetary Policy Committee includes both external and internal members. GerlachKristen (2003c) shows interesting differences in the voting pattern of insiders and outsiders in the U.K. Monetary
Policy Committee. First, external committee members tend to be “doves,” while insiders act as “hawks.” Second,

66 MONETARY AND ECONOMIC STUDIES (SPECIAL EDITION)/OCTOBER 2005

The Monetary Policy Committee and the Incentive Problem: A Selective Survey

The Reserve Bank of New Zealand Amendment Act 2003, separating the chairpersonof the board of directors and the governor, is a response to this idea.37
F. Summary
The models discussed in this section show that voting transparency is beneficial
if central bankers have preferences different from those of the public and do not
conduct socially desirable monetary policy, if for some reasons the society chooses
such central bankers as one of the committee members. Voting transparency is beneficial if it gives relevant information on future monetary policy. Voting transparency
is beneficial if it induces central bankers to be more competent. Those considerations
suggest that, as Blinder (2004) argues, where a committee respects the diversity of
individual opinion and does not strive for group ownership of the decision, thedisclosure of voting might make sense to provide a useful indicator of the balancing
of competing considerations.
The models discussed in this section also show that voting transparency is problematic if an external interest group attempts to influence committee decisions biased
toward special interest policy. Voting transparency is problematic if central bankers
focus too much on appearing as competent individuals and less on overall problems.
Those considerations suggest that, as Blinder (2004) argues, for a committee thatprizes solidarity and strives for group ownership of any decision it makes, while
potentially many interest groups put pressure on their action, it does make sense to
suppress the vote in the interest of maintaining group harmony.

VI. To What Extent Do Committees Credibly Commit to the
Future Course of Monetary Policy?
The papers in the previous sections show the case for a monetary policy committee
on various grounds, and sometimes that open voting is good. Recently, some central
outsiders are more persistent in their dissent than insiders. Why do we observe such a voting pattern? She points
out three reasons. First, internal members might have more similar views about the state of the economy.
Working at the bank may provide them with more information and opportunities for discussions about theeconomy and each other’s views, which might lead them to vote as a block more frequently and to dissent
from the majority more rarely. Second, outsiders may have incentives to use their stay on the committee to raise
their “profile.” Conceivably, dissenting is a means of attracting media attention. Third, and in a similar vein ofstrategic behavior, internal committee members might perceive dissent as not conducive to promoting theircareers at the bank.
37. Svensson (2001) proposed the following changes for the Reserve Bank of New Zealand. He recommended that aformal monetary policy committee, comprised of the governor and four other Reserve Bank staff, be formed.
Named votes and nonattributed minutes should be published. He recommended the following changes to themembership of the bank’s board of directors: (1) the governor and deputy governors should not be members of
the board, as they are at present; (2) the board should consist of nonexecutive directors only; and (3) the chair
should be selected by the board members themselves. The Reserve Bank of New Zealand Amendment Act 2003
implemented the government’s response to the recommendations of Svensson (2001). The amendments toPart III include the following: (1) removing the governor as chairperson of the Reserve Bank’s board of directors,
and providing for a nonexecutive director to be chairperson of the board; (2) retaining the governor on theboard but removing the deputy governor from the board; (3) requiring the board to issue an annual report on
its assessment of the Reserve Bank’s and the governor’s performance; (4) increasing the minimum number ofnonexecutive directors from four to five; (5) requiring the nonexecutive directors to appoint one of their number
as chairperson; and (6) reducing the minimum number of board meetings from 10 per annum to six per annum.

67bank committees have been making policy statements that include their commitment
to a particular style of monetary operation or their commitment to a particular levelof interest rates until some economic conditions are met. However, some monetary
policy committee members are always being replaced. There is no reason why a newcommittee member should accept commitments made by past committee members.
This section presents a negative view on this point, and a theoretical proposal that makes
it possible for a monetary policy committee to maintain a desirable monetary policy
rule across generations. The idea is to give veto power to support the older generationand thereby prevent younger generations from deviating from a good commitment.
A. King’s (2004) Negative View of Future Commitment
King (2004) points out that, in practice, it is difficult to write contracts that commit
to future collective behavior. Collectively, it is possible to ignore the previous commitment. A deeper problem is whether we can expect future board members to keep
previous commitments.
King (2004) is negative regarding the possibility of constraining future members
for two reasons. First, it is impossible to forecast the future completely, thus there
is no enforcement technology. Second, it is impossible to write state-contingent
contracts that forecast all relevant future courses of the economy. He argues thatmonetary institutions are solutions offered by society to this problem, but that there
is no clear answer.
B. Super-Majority Rule May Implement a Commitment Solution
Bullard and Waller (2004) show an example of a monetary authority governed bya super-majority rule, rather than majority voting in the committee, implementing
the commitment of the committee and achieving higher social welfare in a coherent
general equilibrium monetary model.38
They consider an overlapping-generation model with physical capital and fiatmoney, in which all agents live three periods (young, middle-aged, and old). The
agents do not consume or work in their first period of life, but they join the politicalsystem. In the second period, the agents supply labor, join the political system, collectwage income, consume, and save for retirement. In the third period, agents retire,and consume from their savings. Agents in the last period of life are making nofurther decisions, so they have no incentive to join the political system.39
The young care about their wage in middle age, but the middle-aged care about
the returns they will earn between their middle age and old age. In the monetary
equilibrium, higher inflation leads to higher physical capital stock due to Tobin effects,
38. Prior to Bullard and Waller (2004), Faust (1996) considers a two-period overlapping-generation model with fiatmoney as the only asset. The young work and save their earnings via money. The old consume using fiat money.
The population grows in every period. As in Bullard and Waller (2004), in the model of Faust (1996), the youngwant inflation and the old want deflation. Based on majority voting economic policy, the majority of members, ifyoung, will create an inflation bias and everyone will be worse off. A committee consisting of one young and one
old member can resolve the inflation bias problem.
39. This only happens to the very last generation; thus, in a large model with 55 lifetimes, generations 1 to 54 will
participate and the 55th will not. The conflict in this larger model would not only be between the young and the
middle-aged, but also between the young and the old.

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The Monetary Policy Committee and the Incentive Problem: A Selective Survey

and increased marginal productivity of labor and real wages. Higher wages allow
workers to consume more now and save more for the future. Thus, the young want a
low real interest rate and high inflation. The middle-aged want high interest rates, lowinflation, and low capital stock. Therefore, both the young and the middle-aged
cannot implement a socially desirable steady-state inflation rate. Given population
growth, the young are always in the political majority, and prefer higher inflation.
Thus, under majority rule, as long as the old do not join the political system,
the median young voter generates an inefficiently higher inflation rate, and cannot
commit to a stationary inflation path.
Bullard and Waller (2004) suggest that a policy board, which gives some representation to the middle-aged, reduces the inflation bias created by the majority voting
dominated by the young. However, this solution seems to be fragile because theyoung are always in the majority. To overcome this uncertainty, Bullard and Waller(2004) suggest that a super-majority rule, in the sense that current monetary policy
can be changed only if a substantial number of the middle-aged agree with the policy
proposal made by the young. Super-majority voting implements the social optimum,
because the young want to implement today’s monetary policy that will not lead tolower future welfare.
One may still criticize the proposal of Bullard and Waller (2004), because evensuper-majority rule can be changed. Another criticism is that if we regard supermajority rule as a constitutional arrangement, it is well known that constitutionalchanges are rare events, and thus it might be difficult to implement the desired
constitutional change (see Persson and Tabellini [2004] on constitutional inertia).40
Finally, giving veto power to the younger generation rather than the older generation
might be beneficial for reducing inflation bias in other situations. For example, theresults of Cothren (1988) suggest that giving veto power to the younger generation
might be beneficial if the reputation of being an inflation fighter is for the younger
board members the key factor in reducing inflation bias.

VII. Discussion Based on the BOJ’s Experiences
In this section, I discuss two practical issues based on the Japanese experience: withvoting records at the BOJ, and enforcement of commitment for future board
members. Before moving on to the details of the Japanese experience, the next
subsection summarizes major points of the role of the BOJ Policy Board under thecurrent Bank of Japan Law, to help readers understand the following subsections.
A. The BOJ Monetary Policy Board: Background
The Japanese Diet passed the new Bank of Japan Law on June 11, 1997, and thelaw came into effect on April 1, 1998. The new law states: “The Bank of Japan’s
autonomy regarding currency and monetary control shall be respected” (Article 3,
40. However, in the model of Bullard and Waller (2004), it is shown that both the young and middle-aged have
incentives to honor the rule, and it is the design that makes it difficult to change the commitment to desirable
monetary policy rules.

69

Paragraph 1). Article 5, Paragraph 2, of the Bank of Japan Law states that “dueconsideration shall be given to the autonomy of the Bank’s business operations.”41
The new Bank of Japan Law incorporates major revisions to the functions of the
Policy Board, the BOJ’s highest decision-making body, in two respects.
First, the composition of the Policy Board was altered. Under the old law, thePolicy Board consisted of seven members: the Governor of the BOJ; four appointed
members; and two government representatives without voting rights, representing the
Ministry of Finance and the Economic Planning Agency. Under the new law, thePolicy Board consists of nine members: the Governor and the two Deputy Governorsof the BOJ, and six deliberative members.42
Second, the representation of the Policy Board members was changed. Under theold law, two members represented the government. Appointed members had to be
selected from each of the four fields of city banking, regional banking, commerce andindustry, and agriculture. Under the new law, there is no government representative
member on the Policy Board. The Policy Board members can be selected from among
a much broader population, without any restriction on the fields they represent, so longas they are experts, including those on economy or finance.
The new Bank of Japan Law ensures the independence of the Policy Board
members in two respects. First, the members cannot be dismissed for holding
opinions at variance with those of the government. Second, the government cannot
order the Bank to undertake any particular policy action or conduct any particularbusiness operation.43
B. What Does the BOJ Voting Record Tell Us?
This subsection summarizes trends in BOJ Policy Board members’ voting records
under the new law, after April 1998, and provides some discussion. Table 2 summarizes the voting record before March 19, 2001, when the BOJ made a commitment
to a procedure for money market operations until the CPI (excluding perishables, ona nationwide basis) registers stably zero percent or an increase year on year. Table 3
summarizes the voting record from March 19, 2001 until December 2004.
The tables show that first, the Chairman is always on the “winning” side, andsecond, the number of negative votes is usually at most two. At only two meetings
did three members disagree (February 9, 2001 and October 10, 2003).
41. Revision of the Bank of Japan Law was initiated by the three-party coalition government in 1996. More discussions followed at the Central Bank Study Group, an advisory panel to Prime Minister Ryutaro Hashimoto set up
in July 1996, and at the Subcommittee on the Revision of the Bank of Japan Law of the Financial System
Research Council set up in November 1996. For details, see, for example, Matsushita (1997).
42. Two government representatives without voting rights may attend and express views at Policy Board meetings formonetary control matters, submit proposals regarding monetary control matters, or request that the Policy Board
postpone a vote on monetary control matters until the next meeting of this type. If a request is made to postpone
a Policy Board vote, the Policy Board decides whether or not to accommodate the request, in accordance with thesame voting procedures that apply to other matters.
43. It is premature to consider that the revision of the Bank of Japan Law reflects the theoretical argument to foster
central bank independence to achieve price stability. It is well known that Japan was an outlier to this theory’s
prediction, in the sense that a central bank with low legal independence achieves a low inflation record (see,for example, Cukierman [1992]). Walsh (1997) shows that when additional factors that might account forcross-country variation in inflation rates are incorporated into the empirical analysis, Japan no longer appears to
be a significant outlier.

70 MONETARY AND ECONOMIC STUDIES (SPECIAL EDITION)/OCTOBER 2005

The Monetary Policy Committee and the Incentive Problem: A Selective Survey

Table 2 BOJ Voting Record (Before March 19, 2001)
Target levels of the
Number of members Number of members
Names of members who
uncollateralized overnight call rate
who favored thewho opposed the
opposed the Chairman’s(Chairman’s policy proposal)
Chairman’s proposal Chairman’s proposal
proposal
1998/ 4/ 9
On average slightly below the90—
official discount rate (0.5 percent)
4/24
9
0
—
5/19
9
0
—
6/12
7
2
Miki, N. Nakahara
6/25
81
N. Nakahara
7/16
81
N. Nakahara
7/28
81
N. Nakahara
8/11
81
N. Nakahara
9/ 9
On average around 0.25 percent
8
1
Shinotsuka
9/24
81
Shinotsuka
10/13
8
1
Shinotsuka
10/28
7
2
N. Nakahara, Shinotsuka
11/13
8
1
Shinotsuka
11/27
7
2
N. Nakahara, Shinotsuka
12/15
7
2
N. Nakahara, Shinotsuka
1999/ 1/19
7
2
N. Nakahara, Shinotsuka
2/12
As low as possible
8
1
Shinotsuka
2/25
72
N. Nakahara, Shinotsuka
3/12
7
2
N. Nakahara, Shinotsuka
3/25
72
N. Nakahara, Shinotsuka
4/ 9
7
2
N. Nakahara, Shinotsuka
4/22
7
2
N. Nakahara, Shinotsuka
5/18
72
N. Nakahara, Shinotsuka
6/14
72
N. Nakahara, Shinotsuka
6/28
72
N. Nakahara, Shinotsuka
7/16
72
N. Nakahara, Shinotsuka
8/13
72
N. Nakahara, Shinotsuka
9/ 9
72
N. Nakahara, Shinotsuka
9/21
72
N. Nakahara, Shinotsuka
10/13
7
2
N. Nakahara, Shinotsuka
10/27
7
2
N. Nakahara, Shinotsuka
11/12
7
2
N. Nakahara, Shinotsuka
11/26
7
2
N. Nakahara, Shinotsuka
12/17
7
2
N. Nakahara, Shinotsuka
2000/ 1/17
7
2
N. Nakahara, Shinotsuka
2/10
72
N. Nakahara, Shinotsuka
2/24
72
N. Nakahara, Shinotsuka
3/ 8
72
N. Nakahara, Shinotsuka
3/24
72
N. Nakahara, Shinotsuka
4/10
72
N. Nakahara, Shinotsuka
4/27
72
N. Nakahara, Shinotsuka
5/17
72
N. Nakahara, Shinotsuka
6/12
72
N. Nakahara, Shinotsuka
6/28
72
N. Nakahara, Shinotsuka
7/17
72
N. Nakahara, Shinotsuka
8/11
On average around 0.25 percent
7
2
N. Nakahara, Ueda
9/14
81
N. Nakahara
10/13
8
1
N. Nakahara
10/30
8
1
N. Nakahara
11/17
8
1
N. Nakahara
11/30
8
1
N. Nakahara
12/15
8
1
N. Nakahara
2001/ 1/19
8
1
N. Nakahara
2/ 9
63
N. Nakahara, Taya, Ueda
2/28
On average around 0.15 percent
7
2
N. Nakahara, Shinotsuka
Note: Members whose names are underlined and in italics are members who did not mention explicitly the target levels of theuncollateralized overnight call rate or insisted on other objectives than the uncollateralized overnight call rate.
Monetary Policy
Meeting dates

71

Table 3 BOJ Voting Record (After March 19, 2001)
Monetary Policy
Meeting dates
2001/ 3/19
4/13
4/25
5/18
6/15
6/28
7/13
8/14
9/18
10/12
10/29
11/16
11/29
12/19
2002/ 1/16
2/ 8
2/28
3/20
4/11
4/30
5/21
6/12
6/26
7/16
8/ 9
9/18
10/11
10/30
11/19
12/17
2003/ 1/22
2/14
3/ 5
3/25
4/ 8
4/30
5/20
6/11
6/25
7/15
8/ 8
9/12
10/10
10/31
11/21
12/16
2004/ 1/20
2/ 5
2/26
3/16
4/ 9
4/28
5/20
6/15
6/25
7/13
8/10
9/ 9
10/13
10/29
11/18
12/17

Target levels of the outstanding balance Number of members Number of membersof current accounts held at the BOJ
who favored thewho opposed the(Chairman’s policy proposal)
Chairman’s proposal Chairman’s proposal
Around 5 trillion yen
9
0
9
0
9
0
9
0
9
0
9
0
9
0
Around 6 trillion yen
81
Above 6 trillion yen
8
1
8
1
8
1
8
1
8
1
Around 10 to 15 trillion yen
8
1
8
1
8
1
8
1
8
1
9
0
9
0
9
0
9
0
9
0
9
0
9
0
9
0
9
0
Around 15 to 20 trillion yen
9
0
9
0
9
0
9
0
9
0
9
0
9
0
Around 17 to 22 trillion yen
81
Around 22 to 27 trillion yen
90Around 27 to 30 trillion yen
7
2
9
0
9
0
9
0
9
0
8
1
Around 27 to 32 trillion yen
6
3
9
0
9
0
9
0
Around 30 to 35 trillion yen
7
2
9
0
9
0
9
0
9
0
9
0
9
0
9
0
9
0
9
0
9
0
9
0
9
0
9
0
9
0
9
0

72 MONETARY AND ECONOMIC STUDIES (SPECIAL EDITION)/OCTOBER 2005

Names of members
who opposed the
Chairman’s proposal

N. Nakahara
N. Nakahara
N. Nakahara
N. Nakahara
N. Nakahara
N. Nakahara
N. Nakahara
N. Nakahara
N. Nakahara
N. Nakahara
N. Nakahara

FukumaSuda, Taya

FukumaSuda, Taya, Ueda

Suda, Taya

The Monetary Policy Committee and the Incentive Problem: A Selective Survey

These voting patterns are consistent with those of the U.S. Federal Reserve.
Regarding the dominance of the chairperson, Meyer (2004) says that the discussions
at the Monday board meeting are the place to exchange ideas, and there are implicit
commitments to support the chairman the next day.44
Figures 2 and 3 summarize BOJ voting patterns in diagrammatical form. In
constructing Figure 2, I do not include dissenting votes if I clearly do not see the
Figure 2 BOJ Voting Patterns (1)Uncollateralized overnight call rate, percent
0.50
Shinotsuka

Chairman’s proposal
N. Nakahara
Shinotsuka
Ueda
N. Nakahara, Taya, Ueda

0.45
0.40
0.35

Shinotsuka

0.30
0.25
0.20

N. Nakahara

0.15

N. Nakahara,Taya, Ueda

0.10
0.05

Shinotsuka

Ueda“Quantitativeeasing”

N. Nakahara

1998/ 4/ 9
4/24
5/19
6/12
6/25
7/16
7/28
8/11
9/ 9
9/24
10/13
10/28
11/13
11/27
12/15
1999/ 1/19
2/12
2/25
3/12
3/25
4/ 9
4/22
5/18
6/14
6/28
7/16
8/13
9/ 9
9/21
10/13
10/27
11/12
11/26
12/17
2000/ 1/17
2/10
2/24
3/ 8
3/24
4/10
4/27
5/17
6/12
6/28
7/17
8/11
9/14
10/13
10/30
11/17
11/30
12/15
2001/ 1/19
2/ 9
2/28
3/19
4/13
4/25
5/18
6/15

0.00

Notes: 1. On August 11, 2000, we regard Mr. Ueda as wanting to maintain the rate at zero.
According to the minutes, Mr. Ueda dissented for the following reasons. First, it would
be desirable to examine developments in the stock market for a little while longer.
Second, the optimal interest rate had at last reached a level around zero, but it would
be desirable to wait for the rate to rise clearly above zero. And third, judging fromtrends in inflation, the cost of waiting would be negligible. He added that his viewof the economic situation did not differ significantly from that of other members.
2. On February 9, 2001, we assume that Mr. N. Nakahara, Mr. Ueda, and Mr. Tayavoted in favor of this proposal, because these members voted against the Chairman’s
proposal. According to the minutes, Mr. Taya proposed the following guideline formoney market operations for the intermeeting period ahead and reduction of the official discount rate: “The Bank of Japan will encourage the uncollateralized overnight
call rate to move on average around 0.10 percent. The Bank of Japan will reduce theofficial discount rate, with effect from February 13, 2001, by 0.25 percentage point to0.25 percent per annum.”

44. Regarding the upper limit of dissenting votes, Meyer (2004), based on his experience in the FOMC, says that thethird dissenting vote in the FOMC was in open revolt against the chairman’s leadership. Meyer (2004, p. 53) says:“I came to think of the voting process as a game of musical chairs. There were two imaginary red chairs aroundthat table—the ‘dissent chairs.’ The first two FOMC members who sat in those chairs were able to dissent.
After that, no one else could follow the same course.” Meade (2002) examined transcripts from 40 face-toface FOMC meetings from the beginning of 1992 to the end of 1996 and obtained the policy preferences ofparticipants (the voiced dissent) in addition to the official record of voting. The voiced dissent rate for voting
officials and all participants averaged 10.5 percent and 14 percent, respectively. The official dissent rate was only73

Figure 3 BOJ Voting Patterns (2)Outstanding balance of current accounts held at the BOJ, ¥ trillions
40
35
30
25

Chairman’s proposal
N. Nakahara
FukumaSuda, Taya
Suda, Taya, Ueda

Suda, Taya
Suda, Taya, Ueda

20
15

FukumaSuda, TayaN. Nakahara

Whole range of target

10
Average of target level5

2001/ 3/19
4/13
4/25
5/18
6/15
6/28
7/13
8/14
9/18
10/12
10/29
11/16
11/29
12/19
2002/ 1/16
2/ 8
2/28
3/20
4/11
4/30
5/21
6/12
6/26
7/16
8/ 9
9/18
10/11
10/30
11/19
12/17
2003/ 1/22
2/14
3/ 5
3/25
4/ 8
4/30
5/20
6/11
6/25
7/15
8/ 8
9/12
10/10
10/31
11/21
12/16
2004/ 1/20
2/ 5
2/26
3/16
4/ 9
4/28
5/20
6/15
6/25
7/13
8/10
9/ 9
10/13
10/29
11/18
12/17

0

Notes:
1. On May 19 and 20, 2003, we assume that Mr. Taya and Ms. Suda preferred the outstandingbalance of current accounts held at the BOJ unchanged.
According to the minutes, Mr. Taya dissented from the above proposal and explained asfollows. While he was aware that the Bank should provide more liquidity when necessary
to secure financial market stability, taking into consideration the problem of Resona Bank,he considered that the Bank should deal with instability in the money market by using thecontingency clause. Ms. Suda also dissented from the above proposal for the same reasons
as Mr. Taya. In addition, she commented that it would also be appropriate for the Bank to
use the contingency clause to deal with instability in the money market from the viewpointof conducting monetary policy in a manner that was easy for the public to understand.
2. On October 9 and 10, 2003, we assume that Mr. Ueda preferred the outstanding balance of
current accounts held at the BOJ unchanged.
According to the minutes, Mr. Taya dissented from the above proposal for the following
reasons. First, in conducting money market operations, there was no particular problem withthe current range within which the outstanding balance of current accounts at the Bank moved.
And second, preemptive policy action to stabilize interest rates could impair the transparency of
the Bank’s conduct of monetary policy, and would also make it difficult for the Bank to explain it
to the public. Ms. Suda also dissented from the above proposal, and gave the following reasons.
First, it was appropriate to maintain the current guideline for money market operations given the
Bank’s assessment of the economy and the stability of the money market. And second, giventhat it was difficult to explain clearly to the public the Bank’s intention in changing the target
range, it would impair the transparency of the conduct of monetary policy. Mr. Ueda dissented
from the above proposal for reasons similar to those of Mr. Taya and Ms. Suda.
3. On January 19 and 20, 2004, we assume that Ms. Suda preferred the outstanding balance of
current accounts held at the Bank of Japan unchanged.
According to the minutes, Mr. Taya dissented from the above proposal for the following
reasons. Positive effects could not be expected from raising the target range for the outstandingbalance of current accounts at the Bank in the current situation, and there was a risk that it
could lead to various misinterpretations. Ms. Suda also dissented from the above proposal forthe following reasons. First, Japan’s economy was basically in line with the standard scenario,
and was, indeed, recently deviating marginally above the scenario. Second, the money market
was stable. Third, there had been a fair degree of abatement of concerns about financial systemstability and there were some signs of a decrease in demand for funds for the current accounts.
And fourth, there was no technical problem in conducting money market operations at present.
She added that the Bank should shift the focus of its quantitative easing measures from raising
the target range to strengthening their transmission mechanism.

6.7 percent. Federal Reserve policymakers are more willing to speak their minds at FOMC meetings than to votetheir minds on the official record, and this tendency is greater when they do not cast an official vote.

74 MONETARY AND ECONOMIC STUDIES (SPECIAL EDITION)/OCTOBER 2005

The Monetary Policy Committee and the Incentive Problem: A Selective Survey

preferred level of call rates the member has in mind, as we have shown underlined inTable 2.45 This selection helps my analysis in the later part of this subsection to
obtain a hypothetical average voting rate.
Are the Japanese voting patterns in Figures 2 and 3 consistent with the insightof Gerlach-Kristen (2004) that the voting record of the BOE’s Monetary Policy
Committee helps predict future policy rate changes?
I construct a Japanese version of “skew” before March 19, 2001 in Table 4 to see
whether it helps us to forecast the future course of monetary policy. After March 19,
2001, it is difficult to construct a measure such as “skew” because of the zero boundof the nominal interest rate. Hence I focus only on the period from the introductionof the new Bank of Japan Law until March 19, 2001. The variable “skew,” in thethird column, is the gap between the Chairman’s proposal (interest rate chosen,
fourth column) and the average voting rate. In constructing the average voting rate
for dissenting voting members, who did not comment explicitly on the target levelsof the uncollateralized overnight call rate, I cannot guess their actual voting rate.
I write their names in italics and underline them in the seventh column.
Regarding the information value of these voting records, consider the case forAugust 11, 2000, which suspended the zero interest rate policy. On September 20,
the minutes of the August 11 meeting were disclosed and we know that Mr. N.
Nakahara and Mr. Ueda recorded dissenting votes. I assume that the additional valueof the voting record helps to predict the policy change from August 11 to October
13, which is the closest Monetary Policy Meeting date from September 20. Thechanges in the policy rate from the particular meeting date to the closest Monetary
Policy Meeting date after the disclosure of the minutes for the particular meeting islabeled i (t + 3), and listed in the table’s fifth column. The timing of i (t + 3)
reflects the lags in disclosing the minutes in Japan and supposes that the minutes attime t are informative for the third meeting from time t . More specifically, the table’s
sixth column shows the date of future meetings for which the disclosed minutes on
the meeting dates shown in the second column are informative. For example, theminutes of the April 24, 1998 meeting (sample 1) were disclosed on June 17, 1998;
thus, the additional information on the individual voting record, in addition to
the decision of the meeting, helps forecast the decision of the meeting on June 25,
1998 (sample 4, thus, i (t + 3)). Given the nature of this variable, I can only
use skew data up to January 19, 2001, which consists of 52 observations and 10
nonzero observations for i (t + 3).
Observe that the Japanese version of “skew,” which is the difference between the
average voting rate and the majority interest rate, was likely to be dominated by the
45. For example, on September 9, 1999, we do not include the particular target level proposed by Policy Board
member Ms. Shinotsuka. According to the minutes, “Ms. Shinotsuka dissented, commenting as follows.
Although she acknowledged that the Bank’s decision to employ the current zero interest rate policy was based on
careful consideration of its positive and negative aspects, the negative outcomes of this policy had become more
prominent. They were (1) distortion in income distribution, (2) reduced awareness of credit risks, (3) delay instructural adjustment, and (4) heightened risk of confusion accompanying the termination of the prolonged
policy. She also remarked that the economy was gradually becoming more stable. On the basis of this understanding, she considered that it had become even less justifiable to continue the zero interest rate policy.”
However, she did not mention to what extent the rate should be increased. Hence, I do not put a particular rateon September 9, 1999.

75

Table 4 Japanese “Skew”
Meeting dates “Skew,” percent Chairman i(t + 3), percent Timing of t + 3
Dissenting members
1998/ 4/ 9
0.000
0.480
1998/ 6/12
—
1
4/24
0.000
0.480
0.000
6/25
—
2
5/19
0.000
0.480
0.000
7/16
—
3
6/12
–0.013
0.480
0.000
7/28
Miki, N. Nakahara
4
6/25–0.011
0.480
0.000
8/11
N. Nakahara
5
7/16–0.0190.480–0.2309/ 9
N. Nakahara
67/28–0.0190.480–0.2309/24
N. Nakahara
7
8/11–0.0330.480–0.230
10/23
N. Nakahara
8
9/ 9
0.033
0.250
0.000
10/28
Shinotsuka
9
9/24
0.029
0.250
0.000
11/13
Shinotsuka
10
10/13
0.000
0.250
0.000
11/27
Shinotsuka
11
10/28
0.000
0.250
0.000
12/15
N. Nakahara, Shinotsuka
12
11/13
0.000
0.250
0.000
1999/ 1/19
Shinotsuka
13
11/27–0.0170.250–0.2502/12
N. Nakahara, Shinotsuka
14
12/15–0.0250.250–0.2502/25
N. Nakahara, Shinotsuka
15
1999/ 1/19
–0.0250.250–0.250
3/12
N. Nakahara, Shinotsuka
16
2/12
0.000
0.000
0.000
3/25
Shinotsuka
17
2/25
0.000
0.000
0.000
4/ 9
N. Nakahara, Shinotsuka
18
3/12
0.000
0.000
0.000
4/22
N. Nakahara, Shinotsuka
19
3/25
0.000
0.000
0.000
5/18
N. Nakahara, Shinotsuka
20
4/ 9
0.000
0.000
0.000
5/18
N. Nakahara, Shinotsuka
21
4/22
0.005
0.000
0.000
6/28
N. Nakahara, Shinotsuka
22
5/18
0.042
0.000
0.000
7/16
N. Nakahara, Shinotsuka
23
6/14
0.042
0.000
0.000
8/13
N. Nakahara, Shinotsuka
24
6/28
0.042
0.000
0.000
9/ 9
N. Nakahara, Shinotsuka
25
7/16
0.042
0.000
0.000
9/21
N. Nakahara, Shinotsuka
26
8/13
0.042
0.000
0.000
10/13
N. Nakahara, Shinotsuka
27
9/ 9
0.000
0.000
0.000
10/27
N. Nakahara, Shinotsuka
28
9/21
0.000
0.000
0.000
11/12
N. Nakahara, Shinotsuka
29
10/13
0.000
0.000
0.000
11/26
N. Nakahara, Shinotsuka
30
10/27
0.000
0.000
0.000
12/17
N. Nakahara, Shinotsuka
31
11/12
0.050
0.000
0.000
2000/ 1/17
N. Nakahara, Shinotsuka
32
11/26
0.050
0.000
0.000
2/10
N. Nakahara, Shinotsuka
33
12/17
0.042
0.000
0.000
2/24
N. Nakahara, Shinotsuka
34
2000/ 1/17
0.042
0.000
0.000
3/ 8
N. Nakahara, Shinotsuka
35
2/10
0.042
0.000
0.000
3/24
N. Nakahara, Shinotsuka
36
2/24
0.042
0.000
0.000
4/10
N. Nakahara, Shinotsuka
37
3/ 8
0.042
0.000
0.000
4/27
N. Nakahara, Shinotsuka
38
3/24
0.042
0.000
0.000
5/17
N. Nakahara, Shinotsuka
39
4/10
0.042
0.000
0.000
6/12
N. Nakahara, Shinotsuka
40
4/27
0.042
0.000
0.000
6/28
N. Nakahara, Shinotsuka
41
5/17
0.042
0.000
0.000
7/13
N. Nakahara, Shinotsuka
42
6/12
0.042
0.000
0.250
8/11
N. Nakahara, Shinotsuka
43
6/28
0.042
0.000
0.250
9/14
N. Nakahara, Shinotsuka
44
7/17
0.042
0.000
0.250
10/13
N. Nakahara, Shinotsuka
45
8/11–0.042
0.250
0.000
10/13
N. Nakahara, Ueda
46
9/14
0.000
0.250
0.000
10/30
N. Nakahara
47
10/13
0.000
0.250
0.000
11/30
N. Nakahara
48
10/30
0.000
0.250
0.000
12/15
N. Nakahara
49
11/17
0.000
0.250
0.000
2001/ 1/19
N. Nakahara
50
11/30
0.000
0.250
0.000
2/ 9
N. Nakahara
51
12/15
0.000
0.250
0.000
2/ 9
N. Nakahara
52
2001/ 1/19
0.000
0.250
–0.2503/19
N. Nakahara
2/ 9–0.0640.250
N. Nakahara, Taya, Ueda
2/28
–0.0070.150
N. Nakahara, Shinotsuka
3/19
0.075
0.000
—
Note: Members whose names are underlined and in italics are those members who did not mention explicitly the target
levels of the uncollateralized overnight call rate or insisted on other objectives than the uncollateralized overnight
call rate. Before September 9, 1998, the Chairman’s proposals are arbitrarily set at 0.48 percent for the purposeof computation. Before September 9, 1998, the Policy Board was not explicit about the target rate and only stated“on average slightly below the official discount rate” (at that time, 0.5 percent).
Sample76 MONETARY AND ECONOMIC STUDIES (SPECIAL EDITION)/OCTOBER 2005

The Monetary Policy Committee and the Incentive Problem: A Selective Survey

two Policy Board members, Mr. N. Nakahara and Ms. Shinotsuka in Figure 2 andTable 4. One may argue that those two members consistently voted for easing andtightening, respectively; thus, once people know the names of the dissenting voters,
the information value of the voting record may not be rich. Others may well argue
that from Figure 4, which shows i (t + 3) and “skew,” it is obvious that the “skew”
variable predicts the future policy changes, and that the evidence is similar to theresults of Gerlach-Kristen (2004).46
Is Japanese “skew” helpful to predict the future policy change, i (t + 3)? To
answer this question formally, I begin my formal analysis with ordinary least square(OLS) regression and move on to the Granger test.
First, the OLS of i (t + 3) on skew and a constant term yields the estimatesof coefficient on skew that takes a positive value of 2.32 (s.e. = 0.50), which isstatistically significant. Adding the lagged value of i (t + 3), as Gerlach-Kristen(2004) did, the estimate of coefficient on skew is 1.73 (s.e. = 0.42).
Second, I move on to the Granger test following conventional statistical procedure. I begin by rejecting the null hypotheses that i (t + 3) and skew have a unit
root by the augmented Dickey-Fuller test with a 5 percent significance level. The
results should be taken with care because the unit root test in this small sample,
52 observations, might not be very powerful.
Figure 4 Japanese “Skew” and i (t + 3)
Percent

Percent

0.3

0.06

0.2

0.04

0.1

0.02

0.0

0.00

–0.1

–0.02
(t + 3) (left scale)“Skew” (right scale)
–0.04

–0.3

–0.06
1998/ 4/ 9
4/24
5/19
6/12
6/25
7/16
7/28
8/11
9/ 9
9/24
10/13
10/28
11/13
11/27
12/15
1999/ 1/19
2/12
2/25
3/12
3/25
4/ 9
4/22
5/18
6/14
6/28
7/16
8/13
9/ 9
9/21
10/13
10/27
11/12
11/26
12/17
2000/ 1/17
2/10
2/24
3/ 8
3/24
4/10
4/27
5/17
6/12
6/28
7/17
8/11
9/14
10/13
10/30
11/17
11/30
12/15
2001/ 1/19

–0.2

Source: Table 4 of this paper.

46. One may well doubt if the “skew” is applicable to the Japanese zero interest rate policy period, because no Policy
Board member can propose a negative policy interest rate. I do not discuss the issue in this paper.

77

I then find that the Schwarz information criterion shows that the plausible orderof the vector autoregression system of i (t + 3) and skew is one. Finally, I obtain the
results of the Granger causality test. The null hypothesis that skew does not Granger
cause i (t + 3) cannot be rejected (test statistics = 1.87, p -value = 0.18). The null
hypothesis that i (t + 3) does not Granger cause skew is not rejected (test statistics= 1.44, p -value = 0.24).
In sum, there seem to be contemporaneous correlations between skew andi (t + 3), but the Granger causality test does not support the information value of skew
on i (t + 3). I interpret that the lack of Granger causality means that the contemporaneous correlations might be just coincidences of economic conditions judged by the
majority members. My evidence before March 19, 2001, based on 52 samples, suggeststhat the information value of skew may not be so large in Japan in those periods.
Before closing this subsection, I wish to stress that the BOJ does much else totransmit its policy intention apart from revealing the voting record. For example, theBank undertakes a wide variety of activities to inform the public, through various
channels ranging from press conferences and speeches of the Governor, other Policy
Board members, executives and staff, to information on its website. Regarding theinformation to the Diet, a report on currency and monetary control is submitted to
the Diet twice a year, and the Governor or a designated representative appears before
Diet committees, on request, to explain the Bank’s policies. Given the importance of
these for transmitting the policy intentions of the Bank, it is not useful to concentrate
only on the disclosure of voting records. It is better for us to consider the issue of
information disclosure from a central bank as an entire package.47
C. Why Did New BOJ Board Members Honor Past Members’ Commitments?
Ueda (2004) points out a limitation of one of the expectation management approaches,
which raises interest rates more slowly than the Taylor rule predicts as the economy
improves. Ueda says, “A central bank may have to wait a desperately long time before
such improvements take place. Improvements in the economy may not materialize
under the policy board that made the decision.” As King (2004) points out, thedifficulty here is that “collective decisions today may fail to bind future collective
decisions.” Logically, any new Policy Board member does not have to follow thecommitment made by the former Policy Board members. An interesting question is:
Why did Governor Fukui maintain the BOJ’s commitment, which was introducedby the members of the Policy Board as of March 19, 2001? Was the commitment so
reasonable that new members accepted it? Or was there no alternative?
It is too early to know the correct answer to this question. But Japanese examples
in this section show that the theoretical fiction that monetary policy is made by asingle individual maximizing a well-defined preference function misses an important
point. Japanese examples seem to show that the past commitment was honored ifsome of the Policy Board members were replaced, contrary to the idea of King
47. See Blinder (2004, pp. 25–30) regarding the practical considerations on the methods of communication todeliver the message from the central bank: “bias announcement,” the minutes, official tabulations of votes, andtestimony and speeches by committee members.

78 MONETARY AND ECONOMIC STUDIES (SPECIAL EDITION)/OCTOBER 2005

The Monetary Policy Committee and the Incentive Problem: A Selective Survey(2004). In my view, monetary theorists should pay more attention to the nature ofdecision making by committee, as stressed by Blinder (1998).

VIII. Conclusion
My tentative answers to the questions raised in this paper are as follows.
First, giving a long term of office to an independent central banker gives him or
her an incentive to put more into the policymaking process than an elected legislator
would. This extra effort translates, in expectations, into better forecasts and fewer
policy mistakes. The effort increases social benefits, and the legislator’s own utility
increases compared with the case in which legislators run monetary policy by themselves. Delegating responsibility to an independent central banker is an incentive thatlegislators would find attractive.
Second, some theoretical models show that decision making by a committee
dominates that of an individual if there is an incentive for individual members ofa monetary policy committee to gain reputations as inflation fighters, or if an
opportunistic member of a monetary policy committee has an incentive to mimic a
nonopportunistic central banker, or if there is electoral uncertainty that affects thepreference for the degree of stabilization policy determined by politically appointed
central bank committee members.
Third, the Condorcet jury theorem suggests that a larger committee will makebetter decisions. This policy recommendation depends on a lot of assumptions, andmay not be robust if the assumptions do not hold. In practice, the committee members
may vote based not only on their private signals but also on their inferences about othermembers’ private signals, may not obtain signals relevant to their decisions at zero cost,and may exchange views before voting. The optimal committee size weighs the benefitof a diversity of views in a larger committee against the risk of free-riding due to thecost of obtaining relevant information in a larger committee.
Fourth, in theory, voting transparency can be beneficial or problematic. In practice,with a committee that respects diversity of individual opinion and does not strive forgroup ownership of decisions, the disclosure of voting might make sense to provide a
useful indicator of balancing the competing consideration. For a committee that prizes
solidarity and strives for group ownership of any decision it makes, while potentiallymany interest groups may put pressure on their actions, it does make sense to suppress
the voting record in the interest of maintaining group harmony.
Fifth, in theory, collective decisions made by current committee members today
may fail to bind future collective decisions made by future committee members.
However, the Japanese experience of commitment to a procedure for money market
operations until the CPI (excluding perishables, on a nationwide basis) registers stably
zero percent or an increase year on year, shows a counterexample to the argument.
Economists need to do more to interpret this experience and to present a model of theexperience about which there is reasonable consensus.

79

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Comment

Comment
MARVIN GOODFRIEND48
Federal Reserve Bank of Richmond

I. Introduction
It is a pleasure to comment on Hiroshi Fujiki’s excellent survey of the theory of
incentives facing a monetary policy committee. I will try to add value to his survey
with observations based on my 25-year career as a Federal Reserve System economist
and my attendance at Federal Open Market Committee meetings since 1993 as themonetary policy advisor to the president of the Federal Reserve Bank of Richmond.
I have thought often about incentive problems that a monetary policy committee
faces, and I commend the Bank of Japan for hosting a conference on these andrelated matters.
Fujiki addressed five questions in his paper: Why is there an independent central
bank; why delegate monetary policy to a committee rather than to a governor; what
factors should limit the size of the committee; should individual members’ voting
records be disclosed in addition to policy decisions; and can current members
constrain the decisions of future members? I will organize my comments along
similar lines. As will become clear, I have relatively strongly held views with regard tosome of these questions, and weakly held views with respect to others.

II. On Central Bank IndependenceCentral bank independence puts money creation beyond the reach of the fiscal
authorities so that a central bank does not misuse its power to create money forfiscal purposes unrelated to monetary policy.49 Independent central banks do notneed to ask fiscal authorities for appropriations, and cannot be coerced easily toprovide inflationary finance. For instance, the Federal Reserve finances itself withinterest income earned on government securities purchased with non-interest-bearing
currency; it returns interest income after expenses to the fiscal authorities.50
In short, “financial independence” provided by “off-budget” status helps to insulate
a central bank from external pressure. Off-budget status also allows a central bank toundertake sizeable open market operations on short notice without having to submit
to the usual appropriations process. In other words, off-budget status is the foundationof “instrument independence,” the power of a central bank to manage the size andcomposition of its balance sheet as needed to pursue interest rate policy geared tostabilizing the macroeconomy.

48. The views expressed do not necessarily reflect those of the Federal Reserve Bank of Richmond.
49. McCallum (1997) discusses some analytical issues concerning central bank independence.
50. Hetzel and Leach (2001) and Meltzer (2003) discuss the historical tension between the Federal Reserve and the
U.S. Treasury concerning central bank independence.

83Independence alone, however, does not guarantee that a central bank will use its
monetary policy power efficiently to stabilize the macroeconomy. Independence isnecessary but not sufficient to produce good monetary policy, because it leaves acentral bank exposed to external pressure.51 For instance, politicians and the publicoften pressure a central bank to use its money-creating power to keep short-term
interest rates low. Yet monetary economists and central bankers know, and experience
makes clear, that interest rates must be allowed to fluctuate over the business cycle;
otherwise, inflation will rise over time and the economy will develop destabilizing
inflationary go-stop policy cycles.
The exposure of monetary policy committee members to outside influences cannot
be helped. It occurs in the ordinary appointments process. The appointments process
is an unavoidable point of potential pressure on a central bank. Long-term appointments
help solve the problem by causing members of a monetary policy committee tointernalize adverse longer-run consequences of any questionable actions contemplated
under external pressure. But if central bankers’ pay is low relative to private-sector
opportunities, then the average stay on a monetary policy committee may be relatively
short. Membership in a monetary policy committee can become a “stepping stone.”If the stepping stone is to private business, then a central banker may be influenced by
the views of the industry that he or she intends to work for; if the stepping stone is togovernment, then he or she is susceptible to influence from politicians.
The solution is to supplement central bank independence with some “overarchingguidance”—a clearly defined, readily verifiable objective for which the central bank canbe held accountable. The commitment to a commodity standard, for example, the gold
standard, provided that overarching guidance in the past. A national commitment tomaintain a fixed foreign exchange rate provides overarching guidance for many central
banks today. More recently, the formal commitment to low inflation or an inflation
target provides overarching guidance for independent central banks whose foreignexchange rate is allowed to float. The adoption of a formal low-inflation objective byan otherwise independent central bank, and the formal acceptance of that objectiveby the legislative body charged with overseeing monetary policy, gives a monetary
policy committee the incentive to resist counterproductive external pressure.

III. On Delegation to a Committee
Because policymaking involves timely decisions and requires a continuity of focus
based on closely held information, policymakers cannot easily rely on external expertise. A committee can bring individuals with a variety of skills and perspectives to themonetary policy process. Committee members able to read and forecast financial andbusiness conditions are indispensable, as are individuals experienced in monetary
theory, financial markets and banking, nonfinancial business, international trade andfinance, and the regional economies of a given country.
51. Broaddus and Goodfriend (1996, 2001) and Goodfriend (2001) discuss some specific examples of how independence
exposes the Fed to external pressure that is potentially counterproductive for good monetary policy.

84 MONETARY AND ECONOMIC STUDIES (SPECIAL EDITION)/OCTOBER 2005

Comment

Inevitably, interest rate policy is managed closely by a subset of members of amonetary policy committee—usually the chairman, monetary policy specialists on
the committee, and key staff economists. The remaining members of the monetary
policy committee are “inside-outsiders.” Inside-outsiders play a critically importantrole in the policy process. Apart from bringing their diverse perspectives to the table,
inside-outsiders serve as an independent, well-informed sounding board for the views
and judgments of “insiders.”
There are other advantages of policymaking by committee. First, functional divisions
and geographically dispersed regional arms of a central bank can be more thoroughly
informed about monetary policy and more thoroughly integrated into the policy
process if they are managed by committee members. Second, committee members
enhance central bank “outreach” by conveying the monetary policy message to the
public and bringing anecdotal information into the policy process. Third, a formaltranscribed record of committee deliberations can be made available to the public,
presumably with a lag, to provide a means for historians of monetary policy to assess
past policy and help improve monetary policy in the future.

IV. On Limiting the Size of the Committee
For a large currency area, or a continental-sized economy, it stands to reason that
regional representation on a policy committee is advantageous. If an economy iscomplex, even if not particularly large geographically, then it might be useful to havethe views of the key sectors represented on the policy committee. Likewise, a central
bank with a greater range of responsibilities might benefit from a larger policy
committee to accommodate the views of its functional divisions.
Some monetary regimes are inherently more difficult to manage than others. For
instance, a gold standard, a currency board, or a fixed exchange rate regime can be
managed relatively easily. In a fixed exchange rate regime, a central bank need only
follow the interest rate policy of its trading partner. The management of an inflation
targeting regime is more demanding, however, and needs the diversity of skills andperspectives available in a monetary policy committee.
That said, there is a tension between the value of diversity and the cost of reconciling diverse views—a trade-off between diversity and decisiveness. The nature ofthis trade-off may differ among countries; and for this reason, too, the efficient sizeof a policy committee might vary across countries.

V. On Public Disclosure of Individual Members’ Voting Records
Members whose votes are made public have an incentive to formulate their own
policy views more thoroughly and prepare the reasoning in their policy statements
more carefully. Such public disclosure raises the cost of free riding on the views ofothers. This causes members to ask more of their policy advisors. Valuing advice ofstaff economists more highly, in turn, raises the morale of the staff. A central bank,85thereby, has more incentive to improve the quality of its staff and strengthen theorganization more generally.
The public disclosure of individual votes minimizes the chances that votes will betaken for noneconomic reasons, since such votes are difficult to justify. On occasion,differences of opinion disclosed to the public might increase tension among committee members. But airing diverse thinking is the best way to strengthen the public’s
understanding of monetary policy over time. Bottling up differences of opinion
within a committee slows the advance of public discourse and is harmful to a central
bank’s credibility.
Not disclosing individual voting records gives the impression that secrecy has a roleto play in central banking, and needlessly propagates the undeserved and harmful
popular notion that central banks are inherently secretive. Moreover, committee
members can represent the central bank more effectively in public if they can express
fully their own views about policy. Finally, a central bank that keeps individual
votes secret runs the risk that the votes may be leaked to the press. This risk is not
worth running. Leaks are damaging to committee dynamics and to a central bank’s
stature more generally.

VI. On Constraining the Decisions of Future Members
On this issue, I agree with Fujiki as far as he goes. Current members of a monetary
policy committee cannot directly constrain future members to follow through onpolicies, especially if members serve relatively short terms, there is little overlap, anda central bank can be made to change policy through the appointments process.
However, I go further than he does, based on the following reasoning. It is criticalfor good monetary policy that a central bank have the power to commit to futureobjectives. In particular, it is critically important for a monetary policy committee tocommit to maintain price stability in the future to credibly anchor long-run inflation
expectations today. The power to make such a commitment is essential to theefficient pursuit of monetary policy. This logic makes a point closely related to the
one that I emphasized at the beginning of my comment: an independent central
bank must operate with overarching guidance to guarantee its commitment to pricestability, whatever the composition of the policy committee.

References

Broaddus, J. Alfred, and Marvin Goodfriend, “Foreign Exchange Operations and the Federal Reserve,”
Economic Quarterly, Federal Reserve Bank of Richmond, Winter, 1996, pp. 1–20.
———, and ———, “What Assets Should the Federal Reserve Buy?” Economic Quarterly, Federal
Reserve Bank of Richmond, Winter, 2001, pp. 7–22.
Goodfriend, Marvin, “Why We Need an ‘Accord’ for Federal Reserve Credit Policy: A Note,” Economic
Quarterly, Federal Reserve Bank of Richmond, Winter, 2001, pp. 23–32.
Hetzel, Robert L., and Ralph F. Leach, “The Treasury-Fed Accord: A New Narrative Account,”
Economic Quarterly, Federal Reserve Bank of Richmond, Winter, 2001, pp. 33–56.

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Comment

McCallum, Bennett T., “Crucial Issues Concerning Central Bank Independence,” Journal of Monetary
Economics, 39 (1), 1997, pp. 99–112.
Meltzer, Allan H., A History of the Federal Reserve, Volume 1: 1913–1951, Chicago, Illinois: Universityof Chicago Press, 2003.

Comment
ULRICH KOHLI52
Swiss National Bank
I enjoyed reading Hiroshi Fujiki’s paper. It provides a very extensive and welldocumented survey of a difficult literature, one that is relatively new but fast
growing. Originally the literature was dominated by macroeconomists and monetary
economists, but in recent times it seems to have been largely taken over by industrialorganization economists. In what follows, I will follow in Fujiki’s footsteps andconsider the five questions he raises from a Swiss perspective. I am not suggestingthat Switzerland has the right model. On the contrary, I would argue that there
probably is no ultimate model and it is unlikely that one structure dominates all
the others. Whatever solutions different countries adopt very much reflect local
circumstances and history.
The first question—that of independence—is largely settled. Perhaps not forever,for the pendulum might well swing back one day, but it has been put to rest for atleast one generation or so. I certainly agree with Marvin Goodfriend that there must
be some guidance, for independence cannot be unlimited. But I believe that thetheory gives several convincing arguments as to why independence is key. The dynamic
inconsistency and inflation bias arguments as well as the principal-agent literaturesuggest that monetary policy might be too important to be left to politicians. We also
know that monetary policy acts with long lags. Hence, one needs people in charge whohave an extended time horizon, all the more so because it takes time to learn the trade.
In addition, empirical findings are quite convincing in showing that independent
central banks tend to have a better record when it comes to fighting inflation, and thisis so quite independently of the monetary policy committee (MPC) structure.
In Switzerland, the question of independence has never really been much of
an issue. For all practical purposes, the Swiss National Bank (SNB) has always had
independence, at least de facto, although until a few years ago this was not reallyspecified anywhere. It is only since 2000 and the revision of the Swiss Federal
Constitution that it is now explicitly stated that the SNB is an independent central
bank. But the idea of independence has never really been challenged in Switzerland.
The second question—delegation to a committee—is largely settled as well,although I would argue that originally the preference for a committee was probably
mostly dictated by intuition, in essence, the notion that more brains are better thanone. Furthermore, political factors, history, geography, and cultural considerations
52. I am grateful to Andreas Fischer and Petra Gerlach-Kristen for useful discussions and suggestions. Needless tosay, they are not responsible for any errors or omissions.

87

must have played an important role as well. The structures of the Federal Reserve
System, the European Central Bank, and the SNB, for instance, are very much theresult of compromises and the desire to impose checks and balances, between different regions as well as between proponents of federalism and those of centralism. The
SNB’s structure today reflects the outcome of long discussions that took place morethan a century ago, and represents a compromise in a federal state that encompasses
several different cultures and well-defined linguistic regions. Theory now tries torationalize some of the existing structures, which of course is a very valid exercise.
Concerning the third to fifth questions, I would argue not only that the answers
are interrelated, but also that there are several admissible answer sets. Perhaps an
uncontested winner will emerge one day. It is more likely, though, that there are
multiple solutions, each one perfectly valid, and each one reflects initial and local
conditions. In the case of the SNB, we have a committee of three, the Governing
Board.53 Decisions are typically reached by consensus. All three board members havemanagerial duties, and we do not publish minutes or transcripts. These are theanswers in short, but let me elaborate on them in more detail. This also leads me tonote that two issues could have been emphasized somewhat more in the paper. The
first is the question of majority versus consensus decision making. The second is thequestion of internal versus external MPC members.
Let me begin with the question of the MPC’s size. Condorcet’s 1785 theorem
militates in favor of very large committees. In fact, ultimately n should go to infinity.
Thus, why not have a popular referendum every time a monetary policy decisionmust be made? Of course, this would make little sense because, first of all, skills are
scarce. Not everybody has an economics degree, and in fact I know some people
with economics degrees whom I would not want to be on an MPC. Moreover, there
are the free rider problem and opportunity cost considerations—many prospective
MPC members may have other important things to do. Furthermore, there is thepossibility of contact between members, which in itself, I would argue, is a goodthing, but which also undermines the theorem.
On the other hand, the decision-by-consensus model militates in favor of small
committees. I guess at the limit, n should be equal to one, but then we are back tothe second question. So we must find some compromise, which in the Swiss case isn = 3. Admittedly, decision making by consensus has some drawbacks as well.
In particular, it leads to more inertia, which increases the risk of always being behindthe curve.54
So why does the SNB operate in this way? It is very much a Swiss tradition to try toreach a consensus before taking important decisions. This has to do with the fact that
we are a culturally diverse society. Switzerland is made up of 26 cantons, each with
its own distinct history. We have four official languages, well-defined geographic
regions, and urban centers as well as extended rural areas. For the country to survive, it
is simply not possible to have a system where a small majority systematically imposes
its will on a large minority. So typically the discussion continues until there is a broad
53. We also have a board of directors, called the Bank Council. It supervises the running of the bank, but has no saywhatsoever concerning monetary policy.
54. See Gerlach-Kristen (2005).

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Comment

convergence of views. Consensus does not necessarily mean unanimity, but requires
that, as much as possible, decisions be supported by a convincing majority. This is
how the Swiss government works, and also how the SNB functions.
One important advantage of decision making by consensus has to do with ownership. Once a decision is reached—even though it might take longer—all participants
tend to stand firmly behind it. It will be both implemented more resolutely andeasier to communicate externally, as there is just one official view, rather than anarray of conflicting statements. Another important consideration is that committee
members must live with each other. As I mentioned earlier, SNB Governing Board
members are insiders. They are full-time managers and meet several times a monthon all kinds of operational issues. Monetary policy is just one of the many items thatare normally discussed. So if a board member felt that his or her monetary policy
views were systematically being ignored by colleagues, the running of the bank could
become quite awkward.
Of course, this begs the question of why to have an MPC consisting of insiders
in the first place. I would argue that it is very important to have monetary policy
decisions made by professionals. MPC members must be committed to the institution, understand its culture, and have full access to its staff. Insiders have a long-run
commitment, with the opportunity to meet regularly and exchange views. Thereprobably will also be less of a risk of individual profiling. I would be a bit worried
about, for example, an academic—I used to be one myself, so I feel entitled to say
so—who would sit on the MPC every six or eight weeks for a few years, perhaps
making tough calls to build up a reputation of some sort, but without really having
to live with the consequences of his or her actions, because by the time the policy
achieved its full impact, he or she would have long since left the committee.
Let me briefly turn to the last two questions. As I already mentioned, we do not
publish voting records or transcripts. The main reason is because, if a decision ismade by consensus, the voting record has little informative content. In fact, usually
no formal vote takes place. As for transcripts, I would argue that their publication
would do much to inhibit a candid and frank discussion. Consensus suggests thatyou must be able to convince your colleagues, and they must be allowed to change
their minds. They might be more reluctant to do so if they feared that, if it became
known, the public would interpret this as a sign of weakness or incompetence.
Discretion is important in such circumstances. While we do not publish transcripts,
we do publish an extensive collection of documents, including a quarterly monetary
policy report and, whenever a policy decision is taken, a press communiqué that fully
explains the reasons behind the decision. The drafting of the press release requires
a fair bit of time and effort, and I fear that if we were to publish the transcripts aswell, more time would be spent discussing their wording than the monetary policy
decision itself.
The fifth question, that of pre-commitment, is not much of an issue at the SNB,
because board members and their deputies have six-year renewable appointments.
They tend to stay in place for a long time. Furthermore, the age structure is quite
broad, making for overlapping generations. This reinforces continuity, and makes thecorporate culture well established. Perhaps more importantly, the mandate of monetary89

policy is well defined. MPC members know what they have to do. They might comeand go, but the ultimate objective remains the same. Finally, I should add that I am notconvinced in any case that it is a very good idea to pre-commit as to the route you wish
to follow, because circumstances can change and you may want to reconsider later on.
To conclude, Fujiki’s excellent survey article has given me the opportunity to reflect
on some of these important issues, and that has certainly been a useful exercise. Basedon my experience, I can strongly recommend his paper to anyone interested in theworking of modern central banks.

Reference

Gerlach-Kristen, Petra, “Too Little, Too Late: Interest Rate Setting and the Cost of Consensus,”
Economics Letters, 2005 (forthcoming).

General Discussion
Responding to a comment by Marvin Goodfriend on the overarching legislative
framework, Hiroshi Fujiki insisted that incentive issues remained and that there wasa long way to go before an overarching legislative framework could be provided formonetary policy. In regard to the comments by Ulrich Kohli on the consensus versus
majority voting in the presence of differences in the ability of governors or policymakers, Fujiki stated that the theory of voting showed that a weighted average forvoting based on ability would be appropriate in theory. However, in practice it wasdifficult to evaluate the abilities of each member of the committee correctly.
In the general discussion, participants from the floor made a wide range of comments on the five questions raised by Fujiki and on the issues raised by Goodfriend
and Kohli.
In relation to the rationale for an independent central bank, Maurice Obstfeld(University of California at Berkeley) asked whether the different types of independence(for example, instrument versus target independence) actually had an impact on
economic performance. Moreover, he questioned what would happen if the elected
government had set inconsistent goals. Alex Bowen (Bank of England) also expressed
concerns about the tension between competing objectives. Fujiki responded to
Bowen’s question by citing the multitask principal-agent model of Holmström andMilgrom (1991)55 and said that no study had provided a coherent economic model ofthat kind of problem. Erdem Başçi (Central Bank of the Republic of Turkey) statedthat the inflation target should be jointly determined by the central bank and the government in high-inflation countries. Goodfriend emphasized that a goal-independent
central bank could be exposed to external pressure that was counterproductive forgood monetary policy.

55. See B. Holmström and P. Milgrom, “Multitask Principal-Agent Analysis: Incentive Contract, Asset Ownership,
and Job Design,” Journal of Law, Economics and Organization, 7, 1991, pp. 24–52.

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General Discussion

Regarding the case for a monetary policy committee over an individual governor,
Bennett T. McCallum (Carnegie Mellon University) pointed out that the Reserve
Bank of New Zealand was an outlier and wondered if there was an analytical distinction between a governor having advisers and a committee if their voting records andarguments were not revealed. Kohli responded that the Bank of Canada was also an
outlier and then argued that there was a difference, as the committee members had totake ultimate responsibility but advisers did not. George Pickering (Bank of Canada)commented that Fujiki’s paper dealt with a simplified world in considering the roleof voting on the committee. Fujiki responded that most of the literature was basedon jury analysis and that the simplified model helped to avoid the difficult problemof aggregation within the committee.
In relation to the case for a monetary policy committee, Masaaki Shirakawa (Bankof Japan) asked what was the difference between a monetary policy committee andother decision-making bodies. Fujiki responded that a central bank was unique,because it was the one case where delegation to a technocrat was desirable, based on theargument of Maskin and Tirole (2004).56 Goodfriend pointed out that well-establishedmechanisms for appointments did make a difference.
As for the disclosure of voting records or minutes of meetings, Jeromin Zettelmeyer(International Monetary Fund) asked if other participants agreed with Kohli’s opinion
that disclosure of minutes inhibited frank discussion. Goodfriend commented that
he did not think publishing the minutes inhibited discussion. Bowen stated that theminutes had played a very important role in the communication strategy. Jean-Philippe
Cotis (Organisation for Economic Co-operation and Development) stressed that themeetings of a monetary policy committee should be transparent to enhance ownershipby the public. Goodfriend and Kohli agreed with Cotis about the importance ofownership by the public.
With respect to the continuity of monetary policy determined by committee
members with staggered and finite terms of office, Shirakawa asked if staff might playsome role in maintaining policy continuity. Goodfriend agreed with Shirakawa
and stressed that thinking about how to manage staff was an important aspect of
institutional continuity in general. In responding to Goodfriend’s case for inflation
targeting to maintain continuity of monetary policy, Shigenori Shiratsuka (Bank ofJapan) asked whether the argument for the institutionalization of policy objectives
could apply to a framework based on constraint discretion as well as to fully fledged
inflation targeting. Goodfriend agreed with Shiratsuka and stated that he had used
the phrase “inflation targeting” to encompass constrained discretion.
Some participants raised several issues that Fujiki’s paper did not focus on.
Francesco Giavazzi (Università Bocconi) suggested that the background of committee
members and the selection process were important. Wolfgang W. Fritsch (Deutsche
Bundesbank) stressed the significance of ensuring timely and sufficient flows of information to all members of the decision-making body of the central bank. Pickering
pointed out that the central bank should devote considerable time to communicating
56. See E. Maskin and J. Tirole, “The Politician and the Judge: Accountability in Government,” American Economic
Review, 94 (4), 2004, pp. 1034–1054.

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to the public the framework or the paradigm under which decisions were made.
Therefore, Fujiki’s paper required more discussion on the communication strategy ofa central bank other than the voting record, such as governors’ speeches.

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