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Article Excerpt
NOWADAYS, MANY CENTRAL banks publish voting records and the minutes of their meetings. Among them are the Bank of England and the Bank of Japan. However, the European Central Bank (ECB) has always insisted on keeping the details of the decision-making process secret. In this paper, we argue that the ECB, as it is the central bank of a monetary union, has been right to do so. Our main argument is that the opacity of decision making may protect a committee from political interference. Political interference may be detrimental, particularly in a monetary union in which national policymakers may try to promote their national interests.
We present a model to examine the desirability of voting transparency in cases where monetary policy committee members in a monetary union are appointed by national politicians. The publication of voting records in a monetary union may be harmful because national governments may be better able to distinguish partisans, who are only interested in national welfare, from nonpartisan committee members. Thus, they can dismiss nonpartisans only, which lowers the overall welfare of the monetary union. Two extensions of our model, private benefits from holding office and costs of replacing committee members, reveal further opacity advantages.
Additionally, we examine several institutional features and their impact on welfare. We show that, irrespective of the transparency regime, high private benefits from holding office may destroy incentives for committee members to behave optimally from the perspective of the monetary union, as committee members become too focused on holding office. Because wages are one component of the private benefits from holding office, our model might provide a rationale for why central bankers' wages are rather low compared to the wages they could earn in the private sector. Comparably low wages are socially desirable because they reduce the ability of national governments to influence the behavior of "their" committee members. Another measure to reduce the effective influence of national governments would be to commit to golden handshakes for committee members who are not reappointed. We also argue that nonrenewable terms would be desirable for national committee members. Moreover, we show that welfare would rise if all committee members were appointed by a union-wide authority.
One important assumption behind our analysis is that committee members may be more interested in outcomes in their own countries than in the overall outcome for the monetary union. The importance of regional bias on the part of monetary policy committee members has recently been confirmed for the U.S. by Meade and Sheets (2005). (1) If U.S. central bankers' votes are subject to a regional bias, then it seems highly plausible that national biases cannot be excluded for central bankers in the European Monetary Union. Heinemann and Hufner (2004) find some initial empirical evidence that ECB council members take divergences of national data from Eurozone averages into account. An anecdote supporting the view that some national central bankers may particularly promote the perceived interests of their own country is reported in The Economist. (2) The then-president of the Bank of Italy intervened strongly in a takeover battle for the Italian bank "Antonveneta" because of his "desire to keep Antonveneta in Italian hands." (3)
It is important to stress that as our model is framed in general terms, its results can be applied more generally to committee decisions where outside influence by special-interest groups affects voting behavior.
One famous example of a highly confidential committee is the conclave, the meeting in which a new pope is elected. The cardinals are shut off from the outside world during the process. They take an oath to maintain secrecy, and the ballots are burned after each session. The historical rationale for such an extreme degree of secrecy is in line with our findings. In the second half of the nineteenth century the papacy lost control of the Papal States. Consequently, the then-Pope Pius IX feared that the new Italian state would seek to influence the next papal election. Accordingly, he mandated increased secrecy to protect the conclave from outside political interference (see, e.g., Baumgartner 2003).
Our paper contributes to an emerging range of theoretical literature on monetary policy committees. (4) Early contributions were Cothren (1988) and Waller (1989), who considered the dynamics of policy in the light of staggered terms. Waller and Walsh (1996) provide a comprehensive account of how central bank independence can be characterized in terms of competitiveness, partisanship, and term length. Waller (2000) shows that a group of politically appointed committee members can produce substantial policy smoothing and low policy uncertainty. Gerlach-Kristen (2006) also examines the optimality of delegating monetary policy making to a committee and compares different decision-making procedures. (5) While the aforementioned literature abstracts from asymmetric information and only considers sincere voting, a new strand of the literature introduces incentives for committee members to vote strategically (see Bullard and Waller 2004, Gersbach and Hahn 2004, Riboni and Ruge-Murcia 2008). In particular, Riboni and Ruge-Murcia (2008) show that a two-member committee with a chairman, who has the power to set the agenda, leads to inefficient interest-rate smoothing, as the decision in each period determines the default option in the next period. Our paper examines the effects of strategic voting in a dynamic model and thus, it belongs to this new strand of research.
Our paper continues the line of research on the transparency of voting records initiated by Sibert (2003) and Gersbach and Hahn (2004, 2008). In particular, Gersbach and Hahn (2004) suggested that the desirability of voting transparency might depend on whether the appointment of committee members is based upon aggregate welfare or upon special interests. In this paper, we focus on a monetary union with conflicting national interests. It also has a bearing on the broader issue of the optimal degree of central bank transparency, as surveyed by Goodfriend (1986), Geraats (2002), and Hahn (2002).
Finally, our paper takes up the idea of partial central bank independence and confined government interference introduced by Lohmann (1992). She considers a model with complete information where the government can override the central bank's decision at a fixed cost. In our signaling model, national governments have limited influence on monetary policy through their decisions whether or not to reappoint central bankers.
The paper is organized as follows. In the next section, we present our model. A general finding regarding the committee members' votes in the second period is presented in Section 2. In Section 3, we analyze the results under opacity. We consider transparency in Section 4. In Section 5, we show that the proposed reappointment schemes are optimal. We proceed in Section 6 by deriving optimal disclosure policy and optimal institutional features for a central bank in a monetary union. We extend our model by introducing private benefits from holding office in Section 7. In Section 8, we discuss a variety of implications of our results. Section 9 concludes. The proofs for Sections 2-6 can be found in the Appendix published in this article. In a second, unpublished appendix, which is available upon request, we present the proofs for Section 7. The latter appendix also contains an extension of our model to the case where national governments incur costs when they replace committee members.
1. THE MODEL
In this section, we present a two-period model of decision making in a monetary union. We consider N (N > 1, N odd) countries of sizes [[alpha].sub.j]([[alpha].sub.j] > 0, j = 1, ..., N) forming a monetary union ([[summation].sup.N.sub.j=1]) [[alpha].sub.j] = 1). Monetary policy is conducted by a committee comprising N members who decide by majority rule. Each member is appointed by a national government.
There are two potential interest-rate decisions [I.sup.(t)] [member of] {-1; +1) in each period t = 1, 2. (6) The optimal choices for countries j = 1, ..., N, which are denoted by [I.sup.*.sub.j], are drawn from an arbitrary joint distribution on the set [{-1; +1}.sup.N]. They are commonly known. For simplicity, we assume that the optimal choice of monetary policy is constant over time for each country. (7) Welfare in country j for period t is given by
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where we have normalized the national gains from monetary policy to 1 (0) if monetary policy is beneficial (detrimental) for country j. Welfare in the second period is discounted by the common discount factor [delta] (0 < [delta] < 1).
Why might the optimal monetary policy differ across countries? First, national preferences may differ. For example, in some countries price stability may be regarded as much more important than in other countries. Second, economic development and shocks may be different across countries. (8) Thus, a tightening of monetary policy may be optimal for one country, while monetary easing may be optimal for another....
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