Too Many Cooks? Committees in Monetary Policy

Helge BergerInternational Monetary Fund &

Free University Berlin

Volker NitschDarmstadt University &

KOF, ETH Zurich

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?

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?

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)

Determinants of MPC Size 2

• CostsDecision-making: increasing in membership size (Berger 2006)

Example:

Information: decreasing returns & free-riding (Sibert 2006)

403530252015105

4000

3000

2000

1000

0

n

e=1

e=5

C = e [n (n -1)] / 2 + e n

30h27

14h18

4h9

C(n, e=5 min)n

30h27

14h18

4h9

C(n, e=5 min)n

Determinants of MPC Size 3

• Costs (continued)Example: Bundesbank reform

German 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)

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 & heterogeneityDecision-making costs could be lower in environments

used to more democratic decision processesOther 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?

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)

Data

• New data set on MPCs around the world: 33 countries1950-2006annualde jure/de factovarious other features (e.g., composition)

• Compute other measures in addition to MPC size (e.g., governor/membership turnover rate)

Country Sample

Argentina Iceland Pakistan

Australia Ireland Portugal

Austria Israel Singapore

Belgium Italy Spain

Botswana Japan Sweden

Brazil Korea Switzerland

Canada Malaysia Thailand

Denmark Mauritius Trinidad & Tobago

Finland Netherlands Turkey

France New Zealand U.K.

Germany Norway U.S.A.

Data on Board Size

23

21

222930303130292827

22

251816

15

1310

11

7

0

2

4

6

8

10

1950 1955 1960 1965 1970 1975 1980 1985 1990 1995 2000 2005

Data on Board Size

0

2

4

6

8

10

12

1950 1955 1960 1965 1970 1975 1980 1985 1990 1995 2000 2005

5 countries

9 countries

11 countries 4 countries

Episodes of Major Changes in Board Size

78

91

01

1#

me

mb

er

1978 1979 1980 1981 1982 1983

Argentina

05

10

15

20

# m

em

ber

1992 1993 1994 1995 1996 1997

Brazil

68

10

12

14

# m

em

ber

1990 1991 1992 1993 1994 1995

France0

24

68

10

# m

em

ber

1986 1987 1988 1989 1990 1991

New Zealand

78

91

0#

me

mb

er

1967 1968 1969 1970 1971 1972

Turkey

45

67

89

# m

em

ber

1995 1996 1997 1998 1999 2000

Japan

56

78

9#

me

mb

er

1995 1996 1997 1998 1999 2000

Singapore

02

46

81

0#

me

mb

er1994 1995 1996 1997 1998 1999

United Kingdom

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

Event-Study Analysis: Inflation

010

020

030

040

0%

-3 -2 -1 0 1 2 3

Fewer Members

010

2030

40%

-3 -2 -1 0 1 2 3

More Members5

67

8%

-3 -2 -1 0 1 2 3

w/o Argentina & BrazilFewer Members

02

46

8%

-3 -2 -1 0 1 2 3

w/o Argentina & BrazilMore Members

Event-Study Analysis: Real GDP Growth

01

23

4%

-3 -2 -1 0 1 2 3

Fewer Members

01

23

45

%

-3 -2 -1 0 1 2 3

More Members0

12

34

5%

-3 -2 -1 0 1 2 3

w/o Argentina & BrazilFewer Members

01

23

45

%

-3 -2 -1 0 1 2 3

w/o Argentina & BrazilMore Members

Sample Baseline Full (with Argentina, Brazil)

De Facto Membership -0.28** -2.78** 5.27* -22.88*

De Facto Membership Squared 0.13** 1.42*

De Jure Quant. Monetary Target -12.93** -14.86** -117.45** -117.18**

Quant. Monetary Success -2.92** -1.85# 22.82# 33.59*

Turnover Rate Governor 8.58* 13.07** 278.30** 311.48**

Openness (% GDP) 0.001 0.003 -0.07 -0.09

Budget Balance (% GDP) -0.88* -0.83* -1.68 -0.77

Business Cycle (Growth –Avg Growth)

-0.11 -0.19 -9.22# -9.24#

Log Real GDP per capita -5.49** -6.40** -31.91** -31.44**

Log Real GDP -1.11# -1.98* 0.03 -9.83#

Observations 733 733 760 760

Adj. R-squared 0.22 0.25 0.18 0.22

Optimal Board Size

0

2

4

6

8

10

12

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20

0

20

40

60

80

100

120

140

160

180

200

Benchmark (LHS) W/ Argentina & Brazil (RHS)

Other Dependent Variables

Dependent variable Inflation variability Output growth

De Facto Membership -0.09** -0.53** -0.017* 0.08*

De Facto Membership Squared 0.02** -0.005**

…

normalized inflation: NormInflit = Inflationit / (1 + Inflationit)

Other MPC Size Measures

De Facto Size (Second Quartile)

-5.38*

De Facto Size (Third Quartile)

-8.25**

De Facto Size (Fourth Quartile)

-2.46**

De Jure Membership -0.44** -2.20*

De Jure Membership Squared

0.10*

De Facto Voting Membership

-0.29** -1.89*

De Facto Voting Membership Squared

0.10*

Turnover Rate Membership

-3.53**

Other MPC Characteristics

De Facto Membership -2.75*(1.09)

-3.06**(1.05)

-2.80**(1.03)

-3.15**(1.08)

De Facto Membership Squared 0.14*(0.06)

0.15**(0.05)

0.15**(0.05)

0.19**(0.05)

Government Representatives -0.38(0.54)

-0.78(0.67)

Regional Representatives -0.16(0.21)

-1.02**(0.38)

Industry Representatives -0.19#(1.06)

-0.75**(0.15)

MPC Size and Quantitative Targets

De Facto Membership -2.71**(0.95)

-2.69**(0.95)

-2.69**(0.94)

De Facto Membership Squared 0.12**(0.05)

0.12**(0.04)

0.12**(0.04)

Dummy for Large Committees (>10 Members) -9.16* (4.58)

2.11 (3.20)

-8.76# (4.63)

De Jure Quant. Monetary Target -15.49** (4.38)

-14.80** (4.26)

-15.71** (4.53)

De Jure Quant. Monetary Target × Large Committee

12.05* (4.99)

12.99* (5.46)

Quant. Monetary Success -2.00* (0.98)

-2.15# (1.11)

-1.74 (1.13)

Quant. Monetary Success × Large Committee 0.64(1.87)

-1.31 (1.68)

Conclusions

• Evidence that MPC size affects monetary policy outcomes (such as inflation) important feature of CB designU-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 doneStrengthen and extend empirical work: panel estimation

techniques; extend sample Explore interaction with other CB characteristics

Appendix

Size Facts

Distribution (%) Obs.

3 4-6 7-9 10-12 13

Policy 4 28 47 11 10 50

Implementation 4 10 10 40 40 95

Number of Members in Governing Bodies 2003

Source: Lybek & Morris (2005)

Bank (Federal) Council Size

Bank (Central) Council Size

Bundesbank pre-1957 10 Australia 9

Bundesbank 1998 17 Canada 7

Fed 12 New Zealand 1

ECB 2001 18 Sweden 6

ECB (EMU27 w/o, w/ ref.) 33, 21 UK 9

Number of Members in Governing Bodies 2003