Abstract
Economic theory typically assumes that monetary policy is set by a single policy-maker. However, the reality of monetary policy decision-making is very different. Monetary Policy Committees (MPCs) are responsible for setting the short-term interest rate in most countries across the world, and up until very recently, economists paid little serious attention to this fact. In light of this finding, this thesis (i) addresses the current dissonance between the theory and reality of monetary policy decision making and (ii) assesses the empirical evidence on monetary policy committee voting, with emphasis on the voting behaviour of Bank of England MPC members. The thesis contains four core chapters. In Chapter 3 I extend the game-theoretic literature on jury decision making to include the case of a monetary policy committee faced with making a binary choice under simple majority rule. I gauge the extent to which decision outcomes are a function of the amount of effort put into the decisions by individual members when paying attention is not costless. The game builds on Mukhopadhaya (2003), and is of the 'contribution' variety proposed by Rasmusen (2001).In Chapter 4 I present a boundedly-rational model of how monetary policy committees are able to reach decisions on the interest-rate. I draw upon Morris DeGroot's (1974) characterization of consensus formation in groups and DeMarzo, Vayanos and Zweibel's (2003) notion of persuasion bias. Monetary policy committees are shown to reach agreement even when the views its members are initially diverse. The model potentially explains the stylised facts of how members of the United States Federal Open Market Committee, European Central Bank Governing Council and Bank of England Monetary Policy Committee reach a decision on the interest-rate. Chapters 5 and 6 constitute empirical analyses of MPC voting behaviour, and investigate the voting behaviour of members of the Bank of England Monetary Policy Committee over the first five years of its being. This encompasses the entire spell for which the MPC was chaired by Sir Edward George. Using voting data obtained from Minutes of meetings, I show that as a group, internally appointed MPC members (insiders) on average prefer lower interest rates than external appointees (outsiders). Ordered logit analysis demonstrates that insiders and outsiders are motivated by different concerns when setting interest rates. Asymmetric policy preferences exist for the two groups. Insiders are found to dissents significantly less often than outsiders, with the majority of dissents cast by the former group being on the side of tightness. For outsiders, the reverse is shown to be true, with the majority of dissents being for looser policy.