Decision Rules, Transparency and Central Banks

The trade-off between price stability and output stabilization is in the centre of monetary policy-making. This trade-off enters many macroeconomic models as the central bank is assumed to minimize some loss function consisting of inflation deviations and output deviations from some specific targets. The policy instrument to control these variables is the short-term interest rate. Monetary policy-making is usually conducted in committees, whose members may have conflicting interests. This is evident for the Governing Council of the European Central Bank or the Board of Governors of the Federal Reserve System in the United States. In this thesis we take a closer look at monetary policy committees. In particular, we address how decision rules and transparency requirements concerning such rules in monetary policy committees should be designed. In particular we concern ourself with the following two issues:1. Which type of majority rule should be applied in the monetary policy committee?2. Should the public know which decision rule the monetary policy committee applies and should the central bankers release their information about economicshocks?To address these questions, standard monetary models with aggregate demand and supply shocks are introduced and we assume that a committee decides about the interestrate change according to some voting rule. We develop a flexible majority rule, where the majority for interest-rate changes depends itself on the size of the interest-rate change.Our main findings are: First, a well-designed flexible majority rule can improve welfare compared to a fixed majority rule in a simple shock structure. This insight is robust, if we apply more complex shock structures or if we introduce a simple dynamic setup. Second, transparency regarding the rule has ambiguous effects on welfare and it may not be necessary to publish the decision rule, but within our framework, we can provide a best combination of a decision rule and an information setup.