When optimal policymaking is subject to dynamic inconsistencies (Kydland and Prescott, 1977), but shocks hit the economy after private agents form expectations, there is a trade off between the need to commit to a policy, and the need to retain discretion so as to respond to shocks. Rogoff (1985) shows that a way to strike the right balance between commitment and flexibility in monetary policy is to appoint a conservative central banker. I show that a rationale for using a committee to make decisions through voting is that a commitment device can be created out of it, without totally renouncing flexibility to respond to unexpected contingenices. Appropriate voting procedures and a well chosen supermajority rule can make a randomly sampled committee behave like Rogoff`s optimally conservative central banker. The model is developed for the case of monetary policy but these insights are more general (extending to capital taxation and patent protection). Supermajority rules can mitigate time inconsistency by introducing a status quo bias. When voting institutions (ie. the committee`s constitution) are endogenously chosen by simple majority voting, the emerging majority rule is the supermajority yielding the mix of commitment and flexibility preferred by the median voter. A corollary to this provides a theory of why constitutional reform typically requires the approval of a supermajority.
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Paper provided by University of Oxford, Department of Economics in its series Economics Series Working Papers with number
132.
Find related papers by JEL classification: D71 - Microeconomics - - Analysis of Collective Decision-Making - - - Social Choice; Clubs; Committees; Associations D72 - Microeconomics - - Analysis of Collective Decision-Making - - - Models of Political Processes: Rent-seeking, Elections, Legislatures, and Voting Behavior E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies H11 - Public Economics - - Structure and Scope of Government - - - Structure and Scope of Government
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.:
Philippe Aghion & Alberto Alesina & Francesco Trebbi, 2002.
"Endogenous Political Institutions,"
NBER Working Papers
9006, National Bureau of Economic Research, Inc.
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