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The Dynamic (In)efficiency of Monetary Policy by Committee

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  • Alessandro Riboni
  • Francisco Ruge-Murcia

    ()
    (Economics University of Montreal)

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 provides an explanation for the empirical observation that the nominal interest rate under the central bank's control is infrequently adjusted

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Bibliographic Info

Paper provided by Society for Economic Dynamics in its series 2006 Meeting Papers with number 206.

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Date of creation: 03 Dec 2006
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Handle: RePEc:red:sed006:206

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Keywords: Committees; status-quo bias; interest-rate smoothing; dynamic voting;

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