Diverse Views in Monetary Policy

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Monetary policy committees are used across advanced economies (except Canada) because monetary policymaking requires complex real-time judgments.
In practice, committee decision-making has been impaired by groupthink, tokenism, and marginalization of dissenting views.
Authors: DAVID G. BLANCHFLOWER and ANDREW T. LEVIN. Publication: F&D Magazine, March 2023.

Lead-up to the global financial crisis:
- US recession started in December 2007; Europe recession started in April 2008.
- At the Bank of England, one author was the lone dissenter warning of the coming crisis (Blanchflower 2008); the UK MPC inflation report issued in August 2008 made no reference to recession risks.
- In September 2008, shortly after the Lehman failure, the US FOMC concluded that upside risks to inflation and downside risks to economic growth remained roughly balanced and voted unanimously to maintain an unchanged policy stance. By early October, major central banks engaged in an unprecedented coordinated interest rate cut.
COVID-19 period:
- At the 16 FOMC meetings held during 2021 and 2022, there were only two dissents among the total of 174 votes cast.
- No member of the Federal Reserve Board of Governors has dissented from any FOMC decision since 2005.
- In contrast, dissents were relatively common at the UK MPC meetings in 2022, including several meetings with 6-3 vote tallies.

The MPC chair is generally the CEO (referred to as “governor”), who sets meeting agendas and often influences appointments to the MPC.
Internal MPC members (deputy governors and staff) may defer to the governor, particularly where the governor assesses performance and promotion prospects.
External MPC members may have marginal influence if part-time or with limited access to internal analysis and staff expertise.
These arrangements diverge from public- and private-sector governance best practices where boards typically oversee executives and the chair is often not the CEO.

Committee composition:
- Ensure the MPC is composed of a diverse set of experts, including demographic diversity (gender, race, ethnicity), varied educational backgrounds, and professional expertise.
- Ensure geographic diversity across distinct regions of the economy rather than concentration in the primary financial center.
Membership status:
- Every MPC member should serve on a full-time basis.
Appointment and term design:
- Stagger terms of MPC members.
- Appoint each member to a single nonrenewable term.
- Ensure the appointment process is systematic and transparent rather than relying on the discretion of any single government official.
Decision procedures and individual accountability:
- Every MPC policy decision should be subject to a vote.
- All MPC members should be held accountable for their own individual views.
Insulation from political pressure:
- Preserve statutory protections (for example, restrictions on termination except for malfeasance) that strengthen central bank independence.

Public communications:
- MPC members should not be constrained to speak with one voice; they should be accountable for conveying individual views.
- Adopt a practice analogous to judicial opinions: publish majority rulings alongside concurring opinions and dissenting views to clarify rationale and alternative reasoning.
Analytical tools:
- Dot plots show the range of baseline views but provide no information about risks.
- Fan charts convey uncertainty around the baseline but not which risks are most salient.
- The MPC should engage in scenario analysis and contingency planning, identifying material risks and considering policy actions to mitigate those risks.
- This approach is parallel to stress tests used by bank regulators; the MPC should undertake stress-testing for monetary policy.

Implementing governance reforms will align central bank governance with international best practices for public agencies and private institutions.
Full-time, diverse MPCs with shared responsibility are recommended for monetary policy, macroprudential regulation, emergency liquidity provision, and payment system oversight.
Reforms aim to reduce the danger of groupthink, avoid sudden policy reversals that undermine central bank credibility, and preserve the effectiveness of monetary policymaking amid technological and economic change (including artificial intelligence, quantum computing, and nanotechnologies).

Diverse Views in Monetary Policy — DAVID G. BLANCHFLOWER and ANDREW T. LEVIN, F&D Magazine, March 2023.