Paul Tucker: Remarks on "Making Monetary Policy by Committee"
Discussant remarks by Mr Paul Tucker, Executive Director and Member of the Monetary
Policy Committee of the Bank of England, on "Making Monetary Policy by Committee" by
Alan Blinder, at the Bank of Canada Conference "International experience with the conduct
of monetary policy under inflation targeting", Ottawa, 22-23 July 2008.
* * *
Central banking involves a lot of learning - by doing, by thinking, researching, and by
comparing ourselves with our peers. At the core of that learning process is exchanges
amongst central bankers themselves, much of it in Basel. The other rich seam is the
academic literature. But relatively few turn (or return) to scholarly reflection after periods of
alternatively practising and theorising about central banking.
Alan Blinder has therefore provided a signal service, since stepping down as Vice Chairman
of the Federal Reserve Board, through his series of papers on monetary policy practice and
how it both draws on and fuels theory.
Today's paper, on the role of committees in the making of monetary policy1, places central
banks into categories Blinder first set out a few years ago: single decision taker; autocrat-led
college; genuinely-collegial; individualistic. It is especially interesting to the Bank of England,
where for just over a decade we have operated a one-member/one-vote system for deciding
our policy rate. As Blinder rightly says, comparatively speaking, this is clearly at the
'individualistic' end of the spectrum, and is a rare example of the species.
I have comments in three areas: the political economy genesis of the UK's system; how it
bears on the communication of monetary policy or what Blinder called the 'cacophony
problem'; and a plea for Blinder to widen his enquiries beyond interest-rate setting.
Political economy and one-member/one-vote
Modern Britain has no tradition of non-elected officials taking major executive decisions
affecting the whole of the nation. This is in marked contrast to say the US where, at Federal
level, the President is the only member of the executive to have reached office via the ballot
box. Nor in the living memory of the UK people have we had any crises of democracy, so we
have not developed national institutions, such as Germany's Bundesbank, whose place in
society was not mediated via our democratic processes. In consequence, when debates
about the possibility of central bank independence got underway in earnest from the
mid1980s, a widely perceived stumbling block was that central bank officials could not account
personally for their decisions on the Floor of the House (of Commons). There was a
democratic deficit.
Resolution came via the political cost of the failure of other approaches to monetary policy, in
which Ministers running for re-election decided rates; the happenstance of the development
during the 1980s and 1990s of influential committees of Parliament, before which central
bankers could (and frequently do) appear; and specific design features of the monetary
regime itself.2 Those included
- Parliament, in legislation, enshrining the goal of price stability, and requiring the Bank to
publish a quarterly report on the outlook for stability
- the executive arm of government deciding the definition of price stability (2% CPI
inflation target) and setting out requirements for the Bank to explain publicly what is
going on if the target is missed on either side by more than 1pp
- the Committee comprising four 'external' members as well as five internal (or
'executive') members.
The external members were necessary to legitimise giving such an important function to the
Bank. 'One person/one vote', with transparency, was a mechanism for attracting high-quality
'externals' and for ensuring that the introduction of 'new blood' made a difference - that it did
let in 'fresh air' and bring useful expertise to the table. And, of course, the system of
individual voting had to carry across to the 'internals' too. Indeed, as most studies show,
there is no difference between internal and external members in our decision-taking.
The burden of that rehearsal of some UK institutional history is this: that, in comparing
central bank practices, we should not think of our various decision-taking structures solely as
technical solutions to the shared technical problem of deciding a path for rates. Rather, our
varying structures are efforts to solve that shared technical problem in the context of varying
histories and social and political structures. We should understand each other, and adopt
and adapt what could usefully travel across borders, but not proselytise.
Communications, and forecasts
If, adapting Mike Woodford, monetary policy is nearly all about expectations, then
communication matters hugely in real-world policy making (a world in which rational
expectations don't hold and so one in which we cannot passively rely on households and
firms just getting it right by observing our actions). I agree entirely with Blinder that what
kinds of communication are feasible and effective will vary according to the type of
decision-taking structure a central bank employs.
In the Bank of England's case, given one member/one vote, the challenge is how to achieve
a sensible balance of centripetal and centrifugal forces. How this plays out varies across the
different dimensions of monetary policy: the objective, 'model' of the economy, reaction
function, month-by-month decisions, and forecasts, and so on.
As already noted, the objective is laid down by the Chancellor of the Exchequer. As well as
helping to fill the democratic deficit, this coheres with a one person/one vote committee. The
structure would not work well if different members were free to form our own views on the
objective. Amongst other things, that would mean that as the composition of the MPC
changed, the objective could change. This also underpins the utility of the UK MPC's
objective unequivocally giving primacy to inflation; in the jargon, the objective is
lexicographic, with 'avoiding unnecessary volatility in output and employment' occupying a
subsidiary role. This means that we can and do make judgments about the period over which
we should return inflation to target in the wake of a cost shock, notably at present. But we are
not in a position where individual members could choose to subordinate the achievement of
price stability to that of stabilising output.
At the other end of the spectrum, our month-by-month votes on Bank Rate are individualistic
in precisely Blinder's sense. And, as he says, that has clear implications for how we convey
those decisions. The minutes take primacy. That is partly because it is more difficult for us
than for some of our peers to release an informative statement immediately after the policy
meeting: if you don't know what you're going to decide, it is pretty hard to prepare a draft in
advance! Each individual member is obviously in a position to summarise their views. But we
could not sensibly have nine individual statements without risking what Alan Blinder calls
cacophony. Also, such statements would have to be prepared in advance, so there would
probably be less listening and engagement at the policy meeting itself. At the other end of
the spectrum, finding 'the average' for a collective Committee statement is tough in the short
time available, except where a majority has decided to change Bank Rate, or where 'no
change' is driven by some clear common factors that it would be unreasonable to withhold
from the public sphere until publication of the minutes a fortnight later.
'Individualism' is also reflected in our public speeches and appearances before Parliament.
Those individual exercises range widely - from assessments of the conjuncture, through
examinations of particular parts of the transmission mechanism, to reflections on
monetarypolicy making more generally.3 But whatever the subject or scope, we are each speaking for
ourselves, not for the Committee as a whole.
Taken together, all this plainly sets up centrifugal forces, or Blinder's 'cacophony problem'.
As put that matters, since it is of course the systematic component of monetary policy that is
doing the work in stabilising nominal trends. Households, firms, the financial markets need to
figure out what the Committee - or, somehow, its marginal member(s) - thinks is going on in
the economy and how it will react in setting Bank Rate ('our' reaction function).
But there are centripetal influences too. I shall highlight two.
First, the aim of each member is not to be in a minority but for their preferred level of Bank
Rate to be that chosen by a majority of the Committee. This means that, in addition to
clarifying our own thoughts, we are up to a point in the business of persuasion. Ours is not a
system of postal voting. It is a system of listening to and learning from each other.
Second, with qualifications, some of the MPC's communications are relatively more
collective. In particular, our communications on a broadly shared 'model' of how the economy
works, and our forecasts of the outlook for growth and inflation.
In 1998, the (then) Committee published a paper on the Monetary Transmission Mechanism;
and, in a 2007 paper to the Treasury Select Committee of Parliament, we described our view
of material changes in the workings of the economy during the Committee's first ten years.
Both were agreed, collegiate-like documents, while not committing every member to every
proposition.
Much the same can be said of our quarterly forecasts and Inflation Reports, which play a
central role in the MPC's system. Our forecasts are the projections of the policymakers not
the supporting analytical staff. It is striking that the 'individualistic' MPC publishes a common
forecast, whereas the somewhat more-collegial FOMC has long published information (the
central tendency and range) about the forecasts of its individual members (without the
names). The FOMC's approach allows the range of central projections to be transparent. It is
quite different in kind from the fan charts we publish in the UK, showing the band of
uncertainty around central projections for output growth and inflation. Our 'fans' are not, as is
sometimes suggested, a way of encompassing the central view of each of the nine individual
members; they reflect collective discussion and agreement. Mutual engagement would not
be needed if we were in the business of publishing nine individual fan charts. Frequently, we
do indicate in the Inflation Report that different members assign different weights to the
various risks around the central projection. And to be clear, individual members are not
constrained to be part of the collective forecast; if our differences were sufficiently material,
we could make that clear quantitatively in the Inflation Report. But, if at any point, all nine
members did so, the centrifugal elements of our individualistic system could, it seems to me,
lead to genuine cacophony. In the interests of effective policy, the Committee as a whole
therefore has an interest in setting up some centripetal influences, without making them a
binding constraint on individual members.
Thus, the publications on the transmission mechanism and on the economic outlook provide
a broad, common platform for readers to use when making sense of our individual
pronouncements. My hunch is that this gives us greater scope for articulating our individual
views without creating misleading impressions. For example, a paper I delivered last year on
Money and Credit4 went into more detail on those parts of the transmission mechanism than
any collective statement, or than my colleagues might wish to go.
I have found that helpful in recent months, as a few comments on the current conjuncture
might illustrate. My take at our recent July meeting was, broadly, that since the May Inflation
Report, the near-term outlook for inflation had deteriorated, underlining the risk that the rise
in commodity prices will feed through to wage and price setting. The outlook for demand and
output had also deteriorated, which in degree should help to contain those upside risks to
inflation. Going forward, a key judgment will be whether the prospective slowdown will be
sufficient to bring inflation back to target with the current level of Bank Rate, taking into
account the tightening in some broader measures of monetary conditions. The final point is
what I want to highlight in the context of my remarks today. Given a marked increase in credit
rationing in capital markets and bank lending, the conventionally measured short-term
riskfree real rate may not be the same summary statistic of monetary conditions as before the
turmoil. It is currently necessary to undertake a richer analysis of monetary and credit
conditions, which had been the broad theme of my earlier paper. But those remarks about
money and credit were nested within a broadly common approach to the transmission
mechanism and policy.
To recap, the MPC's more collective statements make us free to do our duty in revealing our
individual thoughts without creating a misleading perception of cacophony when it is not
really there.
The challenge for central banks with different decision-taking structures would seem to be
the opposite: (i) how to allow a range of views to be explored seriously so as to avoid
intellectual or analytical inertia - or how to let in fresh air; and (ii) in terms of communications,
how to demonstrate that there is true debate without individual pronouncements being
confused with the collective pronouncements on policy made typically by the Chair.
I think forecasts are central to this. And I would encourage Alan Blinder and his collaborators
to extend their work on the production and role of forecasts in the decision-making of
different central banks; and how the communication of forecasts interacts with the
communication of other elements of the policy process.
Other bits of central banking
Finally, and briefly, I would observe that Blinder's work on decision-taking processes and
structures has so far focused entirely on the setting of interest rates. We have been living
through a decade or more in which, at many although not all central banks, other decisions
affected the financial landscape and risks to stability. Again drawing on his experience as the
Vice Chairman of the Fed Board and again comparing and contrasting different approaches,
I think we would all benefit enormously if Alan Blinder took his scholarly apparatus and spirit
of enquiry into other corners of central banking and how they fit together.