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MPC Decision Making, the long expansion and the crisis:
Heterogeneity and Network Structure
Discussant: Richard Barwell, RBS
Consensus dressed up as dissent
• There is dissent within the MPC – there are frequent differences of opinion on the current policy stance
• However, these differences of opinion are almost always small and typically tiny in comparison to our collective ignorance about the optimal stance
• Conclusion: there is no meaningful heterogeneity• Personalities and conjuncture change but the consensus
remains the same – suggests a powerful mechanism at work
Dissent happens; Major dissent is rare• Dissent is common
– Unanimous decision in around a third of meetings– At most one dissenting vote in around two thirds of meetings– At most two dissenting votes in around four fifths of meetings
• Three way splits are very rare indeed (less so in crisis)– 3% of meetings up to July 2007– 16% since then (personalities not conjuncture?)
• Dissent when you first arrive is extremely rare (4 out of 33)• Most dissent is of the ‘epsilon’ variety (+/‐ 25 bp or bn.)• Can count instances of genuine dissent on fingers of one hand
– Blanchflower (‐25 bp) versus Besley (+25 bp) – summer 2008– Posen (+50 bn.) versus Sentance (+50 bp) – spring 2011
% of votes with/close to consensusup to July 2007; since Aug 2007
40
50
60
70
80
90
100D
avie
s
Geo
rge
Lam
bert
Gie
ve
Cle
men
ti
Bark
er
Bean
Plen
derle
ith
Goo
dhar
t
Lom
ax
Tuck
er
King Be
ll
Vick
ers
Budd
Larg
e
Nic
kell
Wal
ton
Alls
opp
Juliu
s
Wad
hwan
i
Blan
chflo
wer
Besl
ey
Sent
ance
Buite
r
Consensus Consensus +/- Epsilon (25 bp/bn) Per cent
40
50
60
70
80
90
100
Car
ney
McC
affe
rty
Tuck
er
Bark
er
Bean
Broa
dben
t
Lom
ax
King
Gie
ve
Fish
er
Dal
e
Besl
ey
Wea
le
Sent
ance
Mile
s
Pose
n
Blan
chflo
wer
Consensus Consensus +/- Epsilon (25 bp/bn) Per cent
Dissent is not economically meaningful• Dissent is almost always about the current policy setting not
in terms of strategy (a path for Bank Rate) • Indeed very little (too little!) communication about strategy
– Weale (2011) ‘Why the Bank Rate should increase now’ is an honourable exception!
• Difficult to believe that a small, transitory deviation from the optimal path has any impact– i.e., 25 basis point cut in Bank Rate reversed in 3 months
• Difficult to believe that a persistent deviation from the optimal path has a major impact if small – i.e., 25 basis point cut in Bank Rate persists for 2 years
August 2009 Inflation Report
Uncertainty over the optimal stance• Current state of economy unknown• Current structure (model) of economy unknown
– In particular, transmission mechanism unknown
• Distribution of possible shocks facing economy unknown • Miraculous if MPC members arrived at the same (similar)
probabilistic assessment of the outlook if acting in isolation
August 2013 Inflation Report●MPC agree that world is highly uncertain place ● Policy reflects distribution not just the mode● But consensus on policy => MPC members share a common outlook●Whose views do these charts represent and how?
Uncertainty over the optimal stance• Current state of economy unknown• Current structure (model) of economy unknown
– In particular, transmission mechanism unknown
• Distribution of possible shocks facing economy unknown • Miraculous if MPC members arrived at the same (similar)
probabilistic assessment of the outlook if acting in isolation• Even if policymakers all agreed on the exact same description
of the outlook that does not imply common policy response• Loss function is unknown: there is no unambiguous advice on
how to select between different paths• Differences of view on strategy (e.g. merits of gradualism)• Truly miraculous if MPC members arrived at the same policy
setting if acting in isolation
Consensus in the crisis
• World becomes an even more uncertain place but still no evidence of meaningful dissent over assessment of outlook
August 08 and May 09 IRs Profound shift in growth fan chart in 9 months
August 2011 IR Excluding downside risks altogether
Consensus in the crisis • World becomes an even more uncertain place but still no
evidence of meaningful dissent over assessment of outlook• Even if MPC agreed on economic outlook reasonable
differences of view on QE multiplier should deliver differences of opinion on stock of purchases
• Relative merits of different instruments/interventions also highly uncertain … might have expected differences of view on – position of effective lower bound (was 0.5% the right place to stop?)– merits of cut in remuneration of reserves– Impact of other policy interventions (FLS)– … recently, merits of forward guidance
Hawks vs. Doves and all that• Consensual MPC suggests ‘hawks’ and ‘doves’ terminology
(used by MPC watchers like me) is over the top• Does this terminology even make sense? LikelyMPC
members want OG = 0 and inflation = 2% in the medium term• An economic classification of decisions would reflect
– different views on current state of economy– different views on the interest rate multiplier– different views on loss function .. Etc.– Enough data to distinguish between these?
• Closest thing to structural hawk/dove is an asymmetry in perceived costs of above and below target inflation– The Bundesbank view in the Eurosystem
Insiders vs. Outsiders and all that• Likewise, differences between the apparent mentality of
‘insiders’ and ‘outsiders’ is over the top• Consider the diversity within subsets of the internals
– Dale, Fisher, Tucker, Plenderleith – career central bankers– King, Bean – former academics, career central bankers– Gieve, Lomax – former civil servants– Clementi, Large – previous experience in private sector
• Likewise, the voting record in crisis suggest that identification as an ‘academic external’ does not predict voting record– Besley, Blanchflower, Miles, Posen, Weale– Might predict probability of dissent– Need to think about who is applying / who is being chosen
% of votes with/close to consensusup to July 2007; since Aug 2007
40
50
60
70
80
90
100D
avie
s
Geo
rge
Lam
bert
Gie
ve
Cle
men
ti
Bark
er
Bean
Plen
derle
ith
Goo
dhar
t
Lom
ax
Tuck
er
King Be
ll
Vick
ers
Budd
Larg
e
Nic
kell
Wal
ton
Alls
opp
Juliu
s
Wad
hwan
i
Blan
chflo
wer
Besl
ey
Sent
ance
Buite
r
Consensus Consensus +/- Epsilon (25 bp/bn) Per cent
40
50
60
70
80
90
100
Car
ney
McC
affe
rty
Tuck
er
Bark
er
Bean
Broa
dben
t
Lom
ax
King
Gie
ve
Fish
er
Dal
e
Besl
ey
Wea
le
Sent
ance
Mile
s
Pose
n
Blan
chflo
wer
Consensus Consensus +/- Epsilon (25 bp/bn) Per cent
The ‘virtues’ of committees• Absence of heterogeneity explained by discussions within MPC
which breed consensus over– assessment of outlook– perhaps over structure of economy– ….. at a stretch over loss function– But why is there so little dissent when people first join MPC?
• Would like to assume that decision by committee leads to the rejection of bad ideas, theories …. but psychology literature emphasises ‘risky shift’– groups take more extreme decisions
• Other agents of consensus– Staff ?– Governor ?
Why so little dissent?
• Individuals at best vote the direction of their views. Why?• Vote reversals damage the reputation of individual
– being labelled as a flip‐flopper
• Dissent damages the reputation of the Old Lady – ‘if you cannot agree amongst yourselves then……’
• Fear of spooking the markets– Increase uncertainty around future path
• Preference revelation mechanism?– if individuals were asked to publish (defend) their own views on the
outlook and optimal path might see difference of opinion
Communication I
Views of FOMC members on path of FF rate target at end of each period
Transparency on the path not just the current stance
Communication II
Bank Rate Stock of purchased assets
But please emphasise the uncertainty !