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Time Consistency in Dynamic Bargaining: The Role of Committees as Substitutes for Commitment

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  • Alessandro Riboni
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    Abstract

    \QTR{it}{The standard framework to study time consistency assumes that economic decisions are made by one legislator. In this paper policies are negotiated in a committee by playing a dynamic voting game. The implications of this change are remarkable: the social optimum becomes time consistent. While concentration of powers in a single legislator creates credibility problems, we show that separation of powers yields commitment. The main focus of the paper is on the time consistency of monetary policy when decisions are made in a monetary committee, such as the F.O.M.C. or the European Central Bank. We prove that making decisions inside a committee works as a substitute for a commitment technology. Notice that this result may hold even when }$all$\QTR{it}{\ legislators in the committee have a one-shot incentive to deviate from the ex-ante optimal plan. Last, we provide normative prescriptions regarding the identity of the agenda setter and the location of the initial status quo necessary to implement the utilitarian optimum

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    Bibliographic Info

    Paper provided by Society for Economic Dynamics in its series 2004 Meeting Papers with number 684.

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    Date of creation: 2004
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    Handle: RePEc:red:sed004:684

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    Keywords: Time Consistency; Voting; Committees;

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    Cited by:
    1. Emanuel Kohlscheen, 2006. "Sovereign Risk: Constitutions Rule," 2006 Meeting Papers 25, Society for Economic Dynamics.
    2. Carlos Montoro, 2007. "Why Central Banks Smooth Interest Rates? A Political Economy Explanation," Working Papers 2007-003, Banco Central de Reserva del PerĂº.
    3. Francesco Salsano, 2005. "Monetary Policy in the Presence Of Imperfect Observability Of The Objectives Of Central Bankers," Birkbeck Working Papers in Economics and Finance 0523, Birkbeck, Department of Economics, Mathematics & Statistics.
    4. Carlos Montoro, 2007. "Monetary Policy Committees and Interest Rate Smoothing," CEP Discussion Papers dp0780, Centre for Economic Performance, LSE.

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