How do central banks make decisions?

Abstract

This paper studies decision making by the governing council of the Bank of Canada under two alternative protocols. The protocols are: (i) the median model and (ii) the inclusive-voting model due to Riboni and Ruge-Murcia (2020), where the chair and the median share proposal power. Results show that the data favour a version of the inclusive-voting model where the chair of the committee is moderately inclusive and which endogenously generates the consensus outcome in Riboni and Ruge-Murcia (2010). Decision-making frictions are empirically important in the formulation of monetary policy, and the selected policy is the outcome of a compromise between committee members.