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Monetary policy decision-making

 

The Monetary Policy Committee (MPC) of Bank of Mongolia organises its meetings on a regular frequency to discuss monetary policy issues and make policy decisions.

In order to schedule the meetings to discuss monetary policy issues, Bank of Mongolia takes into consideration the seasonal pattern of economic indicators and inflation, historical tendency and the period when national fiscal parameters become observable.

The MPC consist of 8 permanent and 5 temporary members. It discusses a variety of issues relating to making amendments to the monetary policy rate, determining the guidelines for open market operations, defining the amount of long-term Central bank bills to be issued, changing the required reserve ratio, approving and renewing the regulations for the monetary policy instruments, discussing the forecast for economic indicators and determining the appropriate level of exchange rate during its meeting and consults with the Governor of Bank of Mongolia. The Governor makes the final decision.

The monetary policy decision made by the MPC is disclosed to the public by holding a press conference. During the press conference, the Governors of Bank of Mongolia provide an explanation of their decision regarding whether or not to introduce changes in the monetary and exchange rate policies.

The schedule of the press conference is posted on the Bank of Mongolia’s website at the beginning of the year.

Monetary policy decision-making: International practice

One of the significant progresses made in modern central banks’ monetary policy practices is that it moves away from a practice of one person decision making towards a practice of committee decision making. In the mid-1990s when the large central banks such as, Bank of England and Bank of Japan switched to Monetary Policy Committee (MPC) decision making, the concept of MPC attracted other countries’ attention.

Especially, the decisions of central banks which had been successfully implementing the inflation-targeting framework of monetary policy began to be made through the MPC. Asian countries (Thailand and Korea), Scandinavian countries (Norway and Finland), European countries (England, Poland, Czech, Island, Israel, Spain and Hungary) and North and South American countries (Chili, Brazil, Colombia, Mexico and Canada) are examples of countries that are implementing the inflation-targeting framework and their monetary policy decisions are made through the MPC.

A number of research works have been done on an international level to compare between the decisions made by one person and the MPC. The research findings demonstrate that as time goes by, decisions of the MPC are shown to be more accurate (small value for central bank’s loss function) and better implemented (low inflation level) than the decision made by one person.

The MPC is not only a decision-making body, but also responsible for informing the justification and significance of its decision to the relevant organisations and the public. There are lots of benefits to having the MPC to make monetary policy decisions such as, accommodating the independency of central bank’s decisions (avoiding political pressures), building capacity to make policy decisions at a professional level, enhancing the effectiveness of policy decisions and facilitating a transparent and well-defined structure to bear consequences of policy decisions. These factors increase the transparency of the central bank. This has several important implications like, facilitating an environment to enhance public trust placed on the Central bank and to improve policy implementation through inflation expectation and rational behaviour.

To look at other countries’ practices, the MPCs of most countries discuss issues regarding whether or not to make any changes in the monetary policy main instruments and make relevant decisions. As an example, the MPCs of England, Czech, Norway, Brazil and the European Central bank discuss issues relating to whether or not to make any changes in the policy rate. Besides making changes in the main policy instrument, the MPCs of Poland and Thailand are responsible for changing the required reserve ratio, discussing the monetary policy guidelines, evaluating its performance, determining the appropriate level of exchange rate that is consistent with monetary policy, establishing the upper limit on the volume of credit obtained from banking and finance institutions abroad, approving the central bank’s financial plan, reviewing the central bank’s financial report, determining the guidelines for open market operations and approving the forecast of economic indicators by the Central bank.

However in countries like Australia, Canada and Norway, the Board of Directors discusses issues relating to making changes in the monetary policy main instrument. New Zealand’s MPC holds its meeting only with the purpose of providing recommendations to the Central bank regarding the formulation and implementation of monetary policy. There is no voting procedure during the meeting and the minutes of the meeting is not disclosed to the public.

Looking at various countries’ practices, the MPC meeting is held once every month or when necessary. While the MPCs of Czech, Australia, Brazil, Poland and European Central bank hold their meetings once every month in order to discuss their policy rate, the MPCs of Thailand and Norway hold their meeting with a frequency of six weeks.

The process of monetary policy decision-making or the voting procedure is divided into four main categories. These are:

  • At one extreme end of monetary policy decision-making, there is an autocratic decision making approach where the central bank governor independently makes the decision. A classic example is the Reserve Bank of New Zealand. However, the monetary policy decisions of central banks choosing such approach should not be misunderstood as solely the governors’ decision. Such decisions are influenced by recommendations and views from a lot of experts and professors and only the final decision is made independently by the governor.

  • At the other extreme end, there is a decision making approach through pure democratic voting. This type of approach enables everyone to participate equally in the decision-making process. Moreover, the monetary policy decision-making process is fully disclosed to the public. The MPCs following such approach finalise on the decision that receives the majority of the votes.
    There are two other approaches in which the above two extremes of decision-making are somewhat present. These are:

  • Autocratically collegial: The effectiveness of this type of decision-making is defined by the extent to which the governor is able to influence the other committee members. In some cases, the governor makes the decision beforehand but holds the MPC meeting only to inform the other members about the decision or impose his/her decision on others. Another possibility is for the governor to review the decision made by the MPC members and make the final decision by taking into account the MPC decision. However in any case, the final decision holds the characteristics of an independently-made governor’s decision.

  • Collegial: In this type of decision-making, the MPC meeting is held behind closed doors and only the final decision is disclosed to the public. The members’ opinions expressed during the meeting are not disclosed, while only the committee decision is disclosed to the public. The Board of Directors of European Central bank follows such approach.

The most common communication tools used by foreign central banks include publishing the policy decisions of the MPC on media and the website, holding a press conference, disclosing the minutes of the meeting to the public and publishing inflation report.