Monetary policy decision-making when information search is costly

Jung, Alexander and Mongelli, Francesco (2013): Monetary policy decision-making when information search is costly. Published in: Monetary policy decision-making when information search is costly , Vol. 11, No. 1 (25 May 2016): pp. 14-21.

Abstract

This paper explores monetary policy decision-making within an insurance model with expected utility-maximizing policy-makers. The authors consider that policy-makers are different in terms of their backgrounds, experience and skills and they may disagree on the appropriate policy response. In a monetary policy committee, they share information and decide on interest rates by means of an agreed voting rule. The authors show that, in the presence of risk and search costs, it would be optimal for policy-makers to fully insure against the expected loss from a potential policy error. Whether a monetary policy committee sufficiently hedges against this risk will depend on several factors such as the skills of policy-makers, the distribution of members’ beliefs, and the committee’s (statutory) voting rule, but also on other factors not captured by the model.

• Item Type: MPRA Paper
• Language: English
• Keywords: monetary policy committee, analysis of collective decision-making, search costs, voting behavior
• Subjects: D - Microeconomics > D7 - Analysis of Collective Decision-Making > D72 - Political Processes: Rent-Seeking, Lobbying, Elections, Legislatures, and Voting Behavior; D - Microeconomics > D8 - Information, Knowledge, and Uncertainty > D81 - Criteria for Decision-Making under Risk and Uncertainty; D - Microeconomics > D8 - Information, Knowledge, and Uncertainty > D83 - Search ; Learning ; Information and Knowledge ; Communication ; Belief ; Unawareness; E - Macroeconomics and Monetary Economics > E5 - Monetary Policy, Central Banking, and the Supply of Money and Credit > E58 - Central Banks and Their Policies

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