MPC Decision Making, the long expansion and the crisis ... · MPC Decision Making, the long ... –...

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MPC Decision Making, the long expansion and the crisis: Heterogeneity and Network Structure Discussant: Richard Barwell, RBS

Transcript of MPC Decision Making, the long expansion and the crisis ... · MPC Decision Making, the long ... –...

Page 1: MPC Decision Making, the long expansion and the crisis ... · MPC Decision Making, the long ... – 3% of meetings up to July 2007 – 16% since then (personalities not conjuncture?)

MPC Decision Making, the long expansion and the crisis: 

Heterogeneity and Network Structure

Discussant: Richard Barwell, RBS

Page 2: MPC Decision Making, the long expansion and the crisis ... · MPC Decision Making, the long ... – 3% of meetings up to July 2007 – 16% since then (personalities not conjuncture?)

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

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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

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% of votes with/close to consensusup to July 2007; since Aug 2007

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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

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August 2009 Inflation Report

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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

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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?

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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

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Consensus in the crisis 

• World becomes an even more uncertain place but still no evidence of meaningful dissent over assessment of outlook

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August 08 and May 09 IRs Profound shift in growth fan chart in 9 months

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August 2011 IR Excluding downside risks altogether

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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

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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

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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

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% of votes with/close to consensusup to July 2007; since Aug 2007

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Consensus Consensus +/- Epsilon (25 bp/bn) Per cent

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Consensus Consensus +/- Epsilon (25 bp/bn) Per cent

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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 ?

Page 18: MPC Decision Making, the long expansion and the crisis ... · MPC Decision Making, the long ... – 3% of meetings up to July 2007 – 16% since then (personalities not conjuncture?)

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

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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

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Communication II

Bank Rate Stock of purchased assets

But please emphasise the uncertainty !