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The Dynamic (In)Efficiency of Monetary Policy by Committee

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  • ALESSANDRO RIBONI
  • FRANCISCO J. RUGE-MURCIA

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. Copyright (c) 2008 The Ohio State University.

Suggested Citation

  • Alessandro Riboni & Francisco J. Ruge-Murcia, 2008. "The Dynamic (In)Efficiency of Monetary Policy by Committee," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 40(5), pages 1001-1032, August.
    • Handle: RePEc:mcb:jmoncb:v:40:y:2008:i:5:p:1001-1032
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    JEL classification:

    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies
    • D02 - Microeconomics - - General - - - Institutions: Design, Formation, Operations, and Impact

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