On the influence of institutional design on monetary policy making

This thesis consists of a collection of essays on monetary policy making. These essays focus on institutional aspects which impact monetary policy making. Two chapters focus on analyzing voting records of central banks. A method is proposed to use the observed votes to infer the preferences of central bank committee members. These preferences characterize nearly fully the voting behavior. Subsequently these preferences are analyzed to learn about differences between certain groups of committee members. The practical relevance of this is that it allows us to think about how we should design these committees. For example, we show that some voters who are internally appointed tend to have preferences close to each other. If diversity of opinions in a board is deemed important, then this finding suggests that the number of internally appointed members should be limited. This methodology is applied to a variety of central bank committees. Each committee is a different case study and allows us to focus on another aspect. A third chapter presents an analysis of a phenomenon known as the bond yield conundrum. This term refers to the remarkable behavior of long-term U.S. interest rates in the period 2004-2005. To study this we set up a so-called macro-finance model which combines features of modern asset pricing models with empirical macroeconomic methods. Our results are somewhat disheartening in the sense that we are not fully able to explain the behavior. The final chapter gauges the impact of central bank communication on the stock market. Central bank communication is hot nowadays. The Federal Reserve as well as the European Central Bank organize press conferences on a regular basis. These press conferences are one form of communication which is followed closely by financial market participants. In this chapter we set up an event study to analyze the impact of the FOMC communication on the S&P 500. Our results suggest that central bank communication does move the stock market but does so in a nonlinear fashion. The impact depends on the business cycle as well as on the type of stock and industry. Combined, these essays allow the reader to understand some of the intricacies of central bank policy.