RePEc Archive Monetary policy decision - making when information search is costly

This paper explores monetary policy decision-making within an insurance model with expected utility-maximizing policy-makers. The authors consider that policy-makers are different in terms of their backgrounds, experience and skills and they may disagree on the appropriate policy response. In a monetary policy committee, they share information and decide on interest rates by means of an agreed voting rule. The authors show that, in the presence of risk and search costs, it would be optimal for policy-makers to fully insure against the expected loss from a potential policy error. Whether a monetary policy committee sufficiently hedges against this risk will depend on several factors such as the skills of policy-makers, the distribution of members’ beliefs, and the committee’s (statutory) voting rule, but also on other factors not captured by the model.