Uncertainty and Judgment Aggregation in Monetary Policy Committees

Monetary policymakers face considerable uncertainty and have to use judgment. When the monetary policy committee (MPC) has to reach a decision based on different judgments among its members, various judgment aggregation problems may occur. Here, we consider an aggregation problem called the 'discursive dilemma', which is characterized by an inconsistency between the aggregate judgment on the premises for a conclusion and the aggregate judgment on the conclusion itself. If there is a discursive dilemma, the decision will depend on whether the MPC uses a premise-based or a conclusion-based decision procedure. We first show that the discursive dilemma is likely to be relevant for monetary policy decisions. Second, we analyze which decision procedure gives the better results. If there is only additive uncertainty, the two decision procedures are equally good. If there is multiplicative (Brainard) uncertainty, we find that a premise-based procedure gives better monetary policy decisions. Lastly, we discuss implications of our finding for optimal organization of interest rate decisions and for optimal characteristics of MPC members. We find that if the MPC votes directly on the interest rate, and not on the premises, the government should appoint overconfident MPC members, i.e., members who underestimate the true degree of uncertainty