Advanced Search
MyIDEAS: Login to save this paper or follow this series

Monetary Policy Committees and Interest Rate Smoothing

Contents:

Author Info

  • Carlos Montoro

Abstract

We extend the New Keynesian Monetary Policy literature relaxing the assumption that the decisions are taken by a single policymaker, considering instead that monetary policy decisions are taken collectively in a committee. We introduce a Monetary Policy Committee (MPC), whose members have different preferences between output and inflation variability and have to vote on the level of the interest rate. This paper helps to explain interest rate smoothing from a political economy point of view, in which MPC members face a bargaining problem on the level of the interest rate. In this framework, the interest rate is a non-linear reaction function on the lagged interest rate and the expected inflation. This result comes from a political equilibrium in which there is a strategic behaviour of the agenda setter with respect to the rest of the MPC's members. Our approach can also reproduce both features documented by the empirical evidence on interest rate smoothing: a) the modest response of the interest rate to inflation and output gap; and b) the dependence on lagged interest rate; features that are difficult to reproduce in standard New Keynesian models all together. It also provides a theoretical framework on how disagreement among policymakers can slow down the adjustment on interest rates and on "menu costs" in interest rate decisions. Furthermore, a numerical exercise shows that this inertial behaviour of the interest rate is internalised by the economic agents through an increase in expected inflation.

Download Info

If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
File URL: http://cep.lse.ac.uk/pubs/download/dp0780.pdf
Download Restriction: no

Bibliographic Info

Paper provided by Centre for Economic Performance, LSE in its series CEP Discussion Papers with number dp0780.

as in new window
Length:
Date of creation: Feb 2007
Date of revision:
Handle: RePEc:cep:cepdps:dp0780

Contact details of provider:
Web page: http://cep.lse.ac.uk/_new/publications/series.asp?prog=CEP

Related research

Keywords: Monetary Policy Committee; interest rate smoothing; New Keynesian Economics; political economy;

Find related papers by JEL classification:

This paper has been announced in the following NEP Reports:

References

References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
as in new window
  1. Athanasios Orphanides, 1998. "Monetary policy evaluation with noisy information," Finance and Economics Discussion Series 1998-50, Board of Governors of the Federal Reserve System (U.S.).
  2. RIBONI, Alessandro & RUGE-MURCIA, Francisco, 2006. "The Dynamic (In)efficiency of Monetary Policy by Committee," Cahiers de recherche 02-2006, Centre interuniversitaire de recherche en économie quantitative, CIREQ.
  3. Michael Woodford, 1999. "Optimal Monetary Policy Inertia," NBER Working Papers 7261, National Bureau of Economic Research, Inc.
  4. Drora Karotkin, 1996. "Justification of the simple majority and chairman rules," Social Choice and Welfare, Springer, vol. 13(4), pages 479-486.
  5. Gerlach-Kristen, Petra, 2005. "Too little, too late: Interest rate setting and the costs of consensus," Economics Letters, Elsevier, vol. 88(3), pages 376-381, September.
  6. Gerlach-Kristen, Petra, 2006. "Monetary policy committees and interest rate setting," European Economic Review, Elsevier, vol. 50(2), pages 487-507, February.
  7. Athanasios Orphanides, 1998. "Monetary policy rules based on real-time data," Finance and Economics Discussion Series 1998-03, Board of Governors of the Federal Reserve System (U.S.).
  8. Charles Goodhart, 2004. "The Monetary Policy Committee's reaction function: an exercise in estimation," LSE Research Online Documents on Economics 24708, London School of Economics and Political Science, LSE Library.
  9. Sibert, Anne, 1999. "Monetary Policy Committees: Individual and Collective Reputations," CEPR Discussion Papers 2328, C.E.P.R. Discussion Papers.
  10. Brian Sack & Volker Wieland, 1999. "Interest-rate smoothing and optimal monetary policy: a review of recent empirical evidence," Finance and Economics Discussion Series 1999-39, Board of Governors of the Federal Reserve System (U.S.).
  11. von Hagen, Jurgen & Suppel, Ralph, 1994. "Central bank constitutions for federal monetary unions," European Economic Review, Elsevier, vol. 38(3-4), pages 774-782, April.
  12. Ellen E. Meade & D. Nathan Sheets, 2002. "Regional influences on U.S. monetary policy: some implications for Europe," International Finance Discussion Papers 721, Board of Governors of the Federal Reserve System (U.S.).
  13. Alessandro Riboni, 2004. "Time Consistency in Dynamic Bargaining: The Role of Committees as Substitutes for Commitment," 2004 Meeting Papers 684, Society for Economic Dynamics.
  14. Clarida, Richard & Galí, Jordi & Gertler, Mark, 1998. "Monetary Policy Rules and Macroeconomic Stability: Evidence and Some Theory," CEPR Discussion Papers 1908, C.E.P.R. Discussion Papers.
  15. Riboni, Alessandro, 2010. "Committees as Substitutes for Commitment," Economics Papers from University Paris Dauphine 123456789/7684, Paris Dauphine University.
  16. Brian Sack, 1998. "Does the Fed act gradually? a VAR analysis," Finance and Economics Discussion Series 1998-17, Board of Governors of the Federal Reserve System (U.S.).
  17. Richard Clarida & Jordi Gali & Mark Gertler, 1997. "Monetary Policy Rules in Practice: Some International Evidence," NBER Working Papers 6254, National Bureau of Economic Research, Inc.
  18. Hahn, Volker & Gersbach, Hans, 2001. "Should the Individual Voting Records of Central Bankers be Published?," Discussion Paper Series 1: Economic Studies 2001,02, Deutsche Bundesbank, Research Centre.
  19. Gerlach-Kristen Petra, 2004. "Interest-Rate Smoothing: Monetary Policy Inertia or Unobserved Variables?," The B.E. Journal of Macroeconomics, De Gruyter, vol. 4(1), pages 1-19, March.
  20. Waller, Christopher J, 1989. "Monetary Policy Games and Central Bank Politics," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 21(4), pages 422-31, November.
  21. John P. Judd & Glenn D. Rudebusch, 1998. "Taylor's rule and the Fed, 1970-1997," Economic Review, Federal Reserve Bank of San Francisco, pages 3-16.
  22. Petra Gerlach-Kristen, 2009. "Outsiders at the Bank of England's MPC," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 41(6), pages 1099-1115, 09.
  23. Süppel, Ralph & von Hagen, Jürgen, 1994. "Central Bank Constitutions for Monetary Unions," CEPR Discussion Papers 919, C.E.P.R. Discussion Papers.
  24. Gerlach-Kristen, Petra, 2008. "Taking two steps at a time: On the optimal pattern of policy interest rates," Journal of Economic Dynamics and Control, Elsevier, vol. 32(2), pages 550-570, February.
  25. Taylor, John B., 1993. "Discretion versus policy rules in practice," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 39(1), pages 195-214, December.
  26. Philip Lowe & Luci Ellis, 1997. "The Smoothing of Official Interest Rates," RBA Annual Conference Volume, in: Philip Lowe (ed.), Monetary Policy and Inflation Targeting Reserve Bank of Australia.
Full references (including those not matched with items on IDEAS)

Citations

Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
as in new window

Cited by:
  1. Bernd Hayo & Pierre-Guillaume Méon, 2011. "Behind closed doors: Revealing the ECB’s Decision Rule," MAGKS Papers on Economics 201135, Philipps-Universität Marburg, Faculty of Business Administration and Economics, Department of Economics (Volkswirtschaftliche Abteilung).
  2. VanderHart, Peter G., 2009. "What is the best way to impede a central bank?," The Quarterly Review of Economics and Finance, Elsevier, vol. 49(3), pages 784-797, August.
  3. Carsten Hefeker & Blandine Zimmer, 2014. "Optimal Conservatism and Collective Monetary Policymaking under Uncertainty," CESifo Working Paper Series 4933, CESifo Group Munich.
  4. Volker Hahn, 2012. "Designing Monetary Policy Committees," Working Paper Series of the Department of Economics, University of Konstanz 2012-23, Department of Economics, University of Konstanz.
  5. Etienne Farvaque & Norimichi Matsueda & Pierre-Guillaume Méon, 2008. "How monetary policy committees impact the volatility of policy rates," Working Papers CEB 08-026.RS, ULB -- Universite Libre de Bruxelles.

Lists

This item is not listed on Wikipedia, on a reading list or among the top items on IDEAS.

Statistics

Access and download statistics

Corrections

When requesting a correction, please mention this item's handle: RePEc:cep:cepdps:dp0780. See general information about how to correct material in RePEc.

For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: ().

If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

If references are entirely missing, you can add them using this form.

If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.

If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.

Please note that corrections may take a couple of weeks to filter through the various RePEc services.