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The Dynamic (In)efficiency of Monetary Policy by Committee

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  • Riboni, Alessandro
  • Ruge-Murcia, Francesco

Abstract

This paper develops a model where the value of the monetary policy instrument is selected by a heterogenous committee engaged in a dynamic voting game. Committee members differ in their institutional power, and in certain states of nature, they also differ in their preferred instrument value. Preference heterogeneity and concern for the future interact to generate decisions that are dynamically inefficient and inertial around the previously agreed instrument value. This model endogenously generates autocorrelation in the policy variable and helps explain the empirical observation that the distribution of actual interest rate changes has a mode of zero.

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File URL: http://basepub.dauphine.fr/xmlui/bitstream/123456789/7716/1/SSRN-id1406438.pdf
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Bibliographic Info

Paper provided by Paris Dauphine University in its series Economics Papers from University Paris Dauphine with number 123456789/7716.

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Date of creation: Aug 2008
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Publication status: Published in Journal of Money, Credit and Banking, 2008, Vol. 40, no. 5. pp. 1001-1032.Length: 31 pages
Handle: RePEc:dau:papers:123456789/7716

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Related research

Keywords: Interest rate smoothing; status-quo bias; policy conservatism; policy inertia; gridlock interval; dynamic voting;

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