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The Dynamic (In)efficiency of Monetary Policy by Committee

  • Riboni, Alessandro
  • Ruge-Murcia, Francesco

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.

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Paper provided by Paris Dauphine University in its series Economics Papers from University Paris Dauphine with number 123456789/7716.

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Date of creation: Aug 2008
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Publication status: Published in Journal of Money, Credit and Banking, 2008, Vol. 40, no. 5. pp. 1001-1032.Length: 31 pages
Handle: RePEc:dau:papers:123456789/7716
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  4. RIBONI, Alessandro & RUGE-MURCIA, Francisco J., 2007. "Preference Heterogeneity in Monetary Policy Committees," Cahiers de recherche 2007-05, Universite de Montreal, Departement de sciences economiques.
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  8. Meade, Ellen E & Sheets, D Nathan, 2005. "Regional Influences on FOMC Voting Patterns," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 37(4), pages 661-77, August.
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  17. Anne Sibert, 2003. "Monetary Policy Committees: Individual and Collective Reputations," Review of Economic Studies, Oxford University Press, vol. 70(3), pages 649-665.
  18. Clarida, R. & Gali, J. & Gertler, M., 1999. "The Science of Monetary Policy: A New Keynesian Perspective," Working Papers 99-13, C.V. Starr Center for Applied Economics, New York University.
  19. Alessandro Riboni, 2010. "Committees As Substitutes For Commitment," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 51(1), pages 213-236, 02.
  20. Alex Cukierman, 1989. "Why does the Fed smooth interest rates?," Proceedings, Federal Reserve Bank of St. Louis, pages 111-157.
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  23. Sibert, Anne, 1999. "Monetary Policy Committees: Individual and Collective Reputations," CEPR Discussion Papers 2328, C.E.P.R. Discussion Papers.
  24. Robert L. Hetzel, 1998. "Arthur Burns and inflation," Economic Quarterly, Federal Reserve Bank of Richmond, issue Win, pages 21-44.
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  27. Gerlach-Kristen, Petra, 2006. "Monetary policy committees and interest rate setting," European Economic Review, Elsevier, vol. 50(2), pages 487-507, February.
  28. Belden, Susan, 1989. "Policy Preferences of FOMC Members as Revealed by Dissenting Votes," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 21(4), pages 432-41, November.
  29. Alesina, Alberto, 1987. "Macroeconomic Policy in a Two-Party System as a Repeated Game," The Quarterly Journal of Economics, MIT Press, vol. 102(3), pages 651-78, August.
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  34. Alesina, Alberto, 1987. "Macroeconomic Policy in a Two-party System as a Repeated Game," Scholarly Articles 4552531, Harvard University Department of Economics.
  35. Philipp Maier, 2007. "Monetary Policy Committees in Action: Is There Room for Improvement?," Working Papers 07-6, Bank of Canada.
  36. Guthrie, Graeme & Wright, Julian, 2004. "The Optimal Design of Interest Rate Target Changes," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 36(1), pages 115-37, February.
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