But I nevertheless believe that it illustrates the importance of formulating the authorities’ mandate and powers of authority wisely. It also shows that monetary policy and regulation are connected. Each regulation creates a form of “shadow interest rate”. So how can we avoid policy “drifting away” in this unfortunate manner? One possibility is to try to formulate the tasks of the central bank and the financial supervisory authority so that they make a unanimous assessment of what needs to be done. In the figure this would correspond to the green and red curves coinciding. If the curves lie exactly on top of one another, there will not be any interaction that leads to the two means of control being used too aggressively. Another possibility might be to give the central bank the responsibility for both tools – it is not possible to give the financial supervisory authority responsibility for monetary policy. In the figure, the adjustment would then come to a halt after the first interest rate cut. How close this is to the socially optimal point depends on how well the central bank’s loss function agrees with the socially optimal one. But it is almost certainly closer than the policy mix that results from the policies drifting away. A third possibility is that the central bank and the financial supervisory authority coordinate, or negotiate on the policy. It is not clear what this would result in, but it would in any case avoid the inferior policy mix in the alternative without any coordination.
As the saying goes: “two – or rather more – heads are better than one”. And in order to have something to “pool”, the people on the committee should not be too alike. If they all are cast in the same mould and think in the same way, one might just as well have one single policymaker. If there are so many different wills and ways of thinking, how can we actually manage to agree on a detailed, quantified forecast and an exactly determined repo rate path? Also here we can receive guidance from the survey I mentioned earlier. One question in the survey was whether the members had refrained from entering a reservation against one or more monetary policy decisions, despite considering that another decision than the majority view would have been better. Seven of the members, that is, more than half of them, replied that they had. The most important motivation given for this was that they said there was some “bargaining margin” in the repo rate decisions and that the decision reached was sufficiently close to what they would have advocated. In terms of the mean squared gap analysis, one could express this as the members actually preferring different dots, but given that the main scenario dot was sufficiently close to their own, they accepted the main scenario. I believe that this is a fairly important insight: The forecasts we present are often a compromise and an approximation.