The second component of our framework is that the central bank makes monetary policy decisions based on observations - and forecasts - of economic developments. In this context, we will focus on the decision-making process itself from a social psychology perspective: both the work of the decision-making committee, and the relationship between the staff and the committee.

Groupthink risks shaping monetary policy decisions

Monetary policy decisions in Sweden are taken by a group of people, the Executive Board, consisting of five members. It is a dominant practice among central banks to have a committee make monetary policy decisions. In the traditional economics literature, some reasons why groups make better monetary policy decisions than individuals are often mentioned.^[39] See, for example, Blinder (2007) and Rieder (2022). Firstly, the amount of information available increases when more people participate. Second, as in portfolio selection and forecasting theory, there is a diversification argument: An average of several people’s decisions tends to be better than a single person’s decision. And third, and related to the second reason, decisions tend to be less extreme.

However, as described above, the social psychology literature has shown several pitfalls to be aware of when making decisions in groups. It is quite obvious that these pitfalls may also apply to monetary policy decisions within a committee.^[40] See Sibert (2005). Let us say a committee is faced with a choice between two monetary policy options: keeping the policy rate unchanged or raising it by 0.25 percentage points. If one member leans towards the option of raising the policy rate by 0.25 percentage points, but all other members prefer an unchanged rate, conformity may cause the member to bow to the majority and also vote in favour of an unchanged rate - against their own convictions. Groupthink could arise from the committee becoming very close-knit and homogeneous and thus risking ignoring dissenting views inside and outside the central bank.

The Abilene Paradox can also apply if a staff member or decision-maker wrongly assumes that a proposal will not have the support of the committee and therefore never puts it forward. Instead, the member avoids making alternative proposals and the staff member risks only presenting proposals that they think the committee wants.