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This paper relates the volatility of interest rates to the collective nature of monetary policymaking in monetary unions. Several decision rules are modelled, including hegemonic and democratic procedures, and also committees headed by a chairman. A ranking of decision rules in terms of the volatility of policy rates is obtained, showing that the presence of a chairman has a cooling effect. However, members of a monetary union are better off under symmetric rules (voting, averaging, bargaining), unless they themselves chair the union. The results are robust to the inclusion of heterogeneities among members of the monetary union.

A key characteristic of today’s central banking is that monetary policy has become a collective decision. To be specific, there are only three countries left, namely New Zealand, Norway, and Malta, and possibly Canada as Blinder (2004) points out, where monetary policy is still in the hands of a single governor. Elsewhere, committees rule. This feature of modern central banks implies that a decision has to be taken among committee members, which is likely to affect the fluctuations of policy rates, especially if monetary policy committees are heterogeneous, as Von Hagen (1999), Heinemann and Huefner (2004), or Meade and Sheets (2005) suggest. The literature has only recently started taking stock of this evolution. A few contributions have thus studied the consequences of committees on monetary policy, and on the volatility of policy rates. This is the case of Cothren (1988), Sibert (2003), and Fatum (2006), who focus on the impact of monetary policy committees on their institution’s reputation building and on the level of inflation. Gerlach-Kristen (2006) also underlines that committees are an efficient way to deal with monetary uncertainty about the economy, while Waller (2000) stresses that monetary policy committees are a way to cope with political uncertainty. Hefeker (2003), Matsen and Røisland (2005) and Gros and Hefeker (2007) investigate the welfare consequences of decision rules in a monetary union. A reference that explicitly relates the reactivity of central banks to the existence of monetary policy committees is Gerlach-Kristen (2005). However, she studies a limited set of decision rules, and does not investigate their impact on welfare. Moreover, in her model, policymakers only differ in the information they hold about the state of the economy. As a result, in that model, the monetary policy committee works like a jury, where disagreements among members only reflect differences in information, but not conflicting goals. Montoro (2007) and Riboni and Ruge-Murcia (2008) consider committees, where disagreements among members stem from governors having intrinsically different preferences. However, differences in preferences are simply assumed, and do in particular not reflect regional or sectoral heterogeneities. Gerlach-Kristen (2008) shows that, if the chairman of the policy committee is more skilled than the other members, consensus will obtain more easily and undertainty will be reduced. The aim of the present paper is precisely to relate monetary policy’s responsiveness to decision-making in monetary policy committees whose members represent different regions or sectors. In doing so, we extend the literature in several respects. First, we show how asymmetric regional shocks can affect the policy rates set by a federal monetary policy committee. Second, we analyze both a symmetric monetary union and an asymmetric monetary union, and compare monetary policy in both. Third, we most of all study a large spectrum of decision rules, some of which have not been studied so far in the literature on monetary policy. We in particular model the behavior of a monetary policy committee headed by a chairman, a realistic feature of monetary policy committees that has relatively been neglected so far, exceptions being Riboni and Ruge-Murcia (2008) and Gerlach-Kristen (2008). Finally, we consider the welfare implications of all the decision rules studied. We thus obtain a ranking of decision rules in terms of volatility of the chosen policy rate, and in terms of welfare. We show in particular that having a chairman reduces the volatility of policy rates. We finally find that asymmetries matter for the ranking of decision rules not only in terms of welfare but also in terms of the volatility of the interest rate. To do so, the rest of this paper is organized as follows. Section 2 sets up the model on which our reasoning rests. The following section investigates the consequences of delegating monetary policy to a hegemonic decision-maker. Section 4 studies the consequences of democratic decision rules. Section 5 introduces a chairman in the working of the monetary policy committee, and studies the consequences of all the decision rules studied in the presence of asymmetries between member countries. Section 6 concludes.

This paper’s key contention is that different decision rules should lead to different degrees of volatility of the policy rates. We investigated its implications thanks to a standard model of endogenous monetary policy in a monetary union where policy decisions are made by a committee consisting of representatives of member countries. We could thus determine the ranking of those rules in terms of volatility of the interest rate, in terms of macroeconomic volatility, and finally in terms of welfare. In terms of volatility of the interest rate in a symmetric union, the ranking of decision rules by order of decreasing variance of the interest rate is the following: (1) a nationalist hegemon; (2) a nationalist chairman; (3) majority voting; (4) bargaining, consensus, or a federal hegemon; (5) a federal chairman. In terms of expected welfare, the ranking is reversed except that the welfare provided by a federalist chairman slightly exceeds that of majority voting. When asymmetries, calibrated on those existing in the European area, are introduced among members of the monetary union, the ranking of decision rules in terms of their implied volatility of the interest rate is slightly modified and then reads: (1) a nationalist hegemon; (2) consensus; (3) majority voting; (4) a federal hegemon; (5) a federal chairman; (6) bargaining. The volatility of the interest rate when it is set by a committee headed by a nationalist chairman was moreover found to be quite sensitive to her economy’s characteristics. That volatility could be very small or very large depending on the volatility of the chairman’s interest rate. The ranking of rules in terms of expected welfare however differs for each country. Broadly speaking, if a country can neither be the hegemon nor appoint the committee’s chairman, then it will be better off if the committee uses a symmetric decision mechanism, such as the consensus rule of bargaining. By taking committees and chairmen into account, this paper embedded two important features of today’s central banks in the theory of monetary policy-making. However, more work still needs to be done, with several potential extensions. First, other decision rules can be investigated. We restricted ourselves to the most common ones here, but the literature is full of more subtle decision making mechanisms such as, for instance, weighted votes or rotation. The ECB has in particular announced that it will rely on a system referred to as rotation when the Euro area exceeds 15 member countries. However, this system looks in fact like a mixture of rotation and weighted votes, the working of which will only become clear once it has been implemented. Second, the structural model of the economy could be improved. It could in particular be made dynamic, to better describe the inertia of interest rates. Moreover, our theoretical findings could be taken to the data. There are at least two basic ways of doing this. First, the predicted volatility of the interest rate under various decision rules could be compared with the observed volatilities of the interest rates set by monetary policy committees that use those rules. Second, one may also infer the decision rule implied by the observed behavior of the interest rate, in an attempt to determine central banks’ decision rules. In any case, research on monetary policy committees is bound to go on delivering new interesting insights.