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Credibility and Flexibility with Independent Monetary Policy Committees

  • Mihov, Ilian
  • Sibert, Anne

Independent monetary policy committees are a simple way of attaining relatively low inflation without completely sacrificing an activist role for monetary policy. If central bankers' types are unknown, then for a wide range of parameters an independent committee achieves higher social welfare than either a zero-inflation rule or discretionary policy conducted by an opportunistic central banker. A key reason for the committee's superior performance is that committee members are relatively likely to opt for low inflation and building a reputation when shocks are small. When large shocks hit the economy, the incentive to react outweighs the reputation-building benefit.

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Article provided by Blackwell Publishing in its journal Journal of Money, Credit and Banking.

Volume (Year): 38 (2006)
Issue (Month): 1 (February)
Pages: 23-46

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Handle: RePEc:mcb:jmoncb:v:38:y:2006:i:1:p:23-46
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