Too Many Cooks? Committees in Monetary Policy

1. Too Many Cooks? Committees in Monetary Policy Helge Berger International Monetary Fund & Free University Berlin Volker Nitsch Darmstadt University & KOF, ETH Zurich

2. Motivation 1 — The Idea • The quality of monetary policy decisions is, among other things, a function of the design of the decision-making body • Design dimensions include size and (in federal set-ups) centralization, and representation • Size of considerable recent theoretical & practical interest • Example: debate on ECB reform (GC max = 21 > 5-10 avg) • First attempt at providing simple theory & stylized facts: • What arguments may matter for board/MPC size? • What arguments do matter? • Is board/MPC size part of a larger CB design problem?

3. Motivation 2 — MPC Size and Monetary Policy • The number of board members is objective and measurable. • Quality of decision-making process is also influenced by: • Chairman: • Determining the agenda • Meeting procedures • Internal or external members: • Internal members’ career depend on the chairman? • External members and conflict of interest? • Government representatives: • Voting / no voting rights?

4. Determinants of MPC Size • MPC design in general, and decision on size in particular, involve trade-off between costs and benefits(Sibert 2006, Berger 2006, Gerling et al. 2005, Fujiki 2005) • Benefits • Information: larger MPCs better at collecting and processing information under uncertainty(Gerlach-Kristen 2006, Blinder/Morgan 2005, Lombardelli et al. 2005, Berk/Bierut 2004) • Moderation: larger MPC moderate extreme views(Riboni/Ruge-Murcia 2006, Sibert 2006, Blinder 1998) • Political Economy: larger MPCs may help insulate individuals from political pressure(Blinder 2006)

5. 4000 3000 e=5 2000 e=1 1000 n 0 5 10 15 20 25 30 35 40 Determinants of MPC Size 2 • Costs • Decision-making: increasing in membership size (Berger 2006) Example: • Information: decreasing returns & free-riding (Sibert 2006) C = e [n (n -1)] / 2 + e n

6. Determinants of MPC Size 3 • Costs (continued) • Example: Bundesbank reformGerman Bundesbank asserts that its 1992 MPC reform triggered by German unification helped preventing an increase in MPC size which “would have greatly complicated that body’s decision-making processes” (Deutsche Bundesbank 1992, p.50) • Example: ECB reformECB admitted fear that anticipated increase in the number of national central bank governors attending euro area MPC meetings after EMU enlargement “will not necessarily make deliberations easier…”. (ECB 2003, p.83)

7. Determinants of MPC Size 4 • Country characteristics:Goodfriend (2005):“efficient size of a policy committee might vary across countries” • Information-related benefits are likely to be increasing in country size & heterogeneity • Decision-making costs could be lower in environments used to more democratic decision processes • Other economic, political, and institutional factors, e.g. income levels, fiscal behavior, monetary policy regime, other features of the central bank set-up may matter, too • Use this variation to identify determinants of MPC size  How to think about the underlying design process?

8. Literature • Costs and benefits of MPC size (applied theoretical, institutional or experimental perspectives) (Blinder 1998, Gerlach-Kristen 2006, Blinder and Morgan (2005), Lombardelli et al. 2005, Sibert 2006) • Empirics of MPC design (Berger et al. 2008, Erhart and Vasquez-Paz 2007) • Effects of institutional features of central banking on monetary policy (Cukierman et al. 1992, de Haan and Kooi 2000, Göhlmann and Vaubel 2007) • Effects of board size (and other board characteristics) on corporate performance (Yermack 1996, Hermalin and Weisbach 2003, de Andres and Vallelado 2008)

9. Data • New data set on MPCs around the world: • 33 countries • 1950-2006 • annual • de jure/de facto • various other features (e.g., composition) • Compute other measures in addition to MPC size (e.g., governor/membership turnover rate)

10. Country Sample

11. Data on Board Size

12. Data on Board Size

13. Episodes of Major Changes in Board Size

14. Methodology • Aim: Measure the “success” of monetary policy • Event-study approach • Fatas, Mihov, and Rose (JMCB, 2007): Controls: Openness, Budget deficit, BusCycle, Per capita income, GDP  Does board size matter? Inflationit+1 =  + 1 Targetit + 2 Successit+  Yi + i

15. Event-Study Analysis: Inflation

16. Event-Study Analysis: Real GDP Growth

18. Optimal Board Size

19. Other Dependent Variables normalized inflation: NormInflit = Inflationit / (1 + Inflationit)

20. Other MPC Size Measures

21. Other MPC Characteristics

22. MPC Size and Quantitative Targets

23. Conclusions • Evidence that MPC size affects monetary policy outcomes (such as inflation)  important feature of CB design • U-shaped relationship; minimum level of inflation is reached at about 8 to 10 members • Other MPC characteristics also of importance • A lot is left to be done • Strengthen and extend empirical work: panel estimation techniques; extend sample • Explore interaction with other CB characteristics

24. Appendix

25. Size Facts Number of Members in Governing Bodies2003 Source: Lybek & Morris (2005) Number of Members in Governing Bodies2003