Inflation targeting, committee decision making and uncertainty: The case of the Bank of England's MPC

Transparency and openness of the monetary policymaking process at the Bank of England has provided very detailed information on both the decisions of individual members of the Monetary Policy Committee and the information on which they are based. We consider this decision making process in the context of a model in which inflation forecast targeting is used but there is heterogeneity among the members of the committee. We find that internally generated forecasts of output and market generated expectations of medium term inflation provide the best description of discrete changes in interest rates. We find a role for asset prices through the equity market, foreign exchange market and housing prices. There are identifiable forms of heterogeneity among members of the committee that improves the predictability of interest rate changes. This can be thought of as supporting the argument that full transparency of monetary policy decision making can be welfare enhancing.