MPC Voting, Forecasting and Inflation

This paper considers the effectiveness of monetary policy committee voting when the inflation forecast signals, upon which decisions are based, may be subject to manipulation. Using a discrete time intertemporal model, we examine the distortions resulting from such manipulation under a three-way voting system, similar to that used by the Bank of Sweden. We find that voting itself creates persistence in inflation. Whilst altering the forecast signal, even if well intentioned, results in a diminished probability of achieving the inflation target. However, if committee members ‘learn’ in a Bayesian manner, this problem is mitigated.