Explaining Interest Rate Decisions When the MPC Members Believe in Different Stories

21 Pages Posted: 13 Nov 2013

See all articles by Carl Andreas Claussen

Carl Andreas Claussen

Sveriges Riksbank

Øistein Røisland

Norges Bank - Department of Economics

Date Written: February 7, 2013

Abstract

Modern central banks do not only announce the interest rate decision, they also communicate a "story" that explains why they reached the particular decision. When decisions are made by a committee, it could be difficult to find a story that is both consistent with the decision and representative for the committee. Two alternatives that give a unique and consistent story are: (i) vote on the interest rate and let the winner decide the story, (ii) vote on the elements of the story and let the interest rate follow from the story. The two procedures tend to give different interest rate decisions and different stories due to an aggregation inconsistency called the "discursive dilemma". We investigate the quality of the stories under the two approaches, and find that alternative (ii) gives stories that tend to be closer to the true (but unobservable) story. Thus, our results give an argument in favour of premise-based, as opposed to conclusion-based, decisionmaking.

Keywords: Monetary policy committees, Communication, Judgement aggregation, Discursive dilemma

JEL Classification: E52, E58, D71

Suggested Citation

Claussen, Carl Andreas and Røisland, Øistein, Explaining Interest Rate Decisions When the MPC Members Believe in Different Stories (February 7, 2013). Norges Bank Working Paper 2013 | 07, Available at SSRN: https://ssrn.com/abstract=2353353 or http://dx.doi.org/10.2139/ssrn.2353353

Carl Andreas Claussen (Contact Author)

Sveriges Riksbank ( email )

Brunkebergstorg 11
SE-103 37 Stockholm
Sweden

Øistein Røisland

Norges Bank - Department of Economics ( email )

P.O. Box 1179
Oslo, N-0107
Norway
+47 22 31 67 39 (Phone)
+47 22 31 60 50 (Fax)

Do you have a job opening that you would like to promote on SSRN?

Paper statistics

Downloads
14
Abstract Views
429
PlumX Metrics