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The Dynamic (In)efficiency of Monetary Policy by Committee

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  • RIBONI, Alessandro
  • RUGE-MURCIA, Francisco

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 ineffcient 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.

Suggested Citation

  • RIBONI, Alessandro & RUGE-MURCIA, Francisco, 2006. "The Dynamic (In)efficiency of Monetary Policy by Committee," Cahiers de recherche 2006-02, Universite de Montreal, Departement de sciences economiques.
    • Handle: RePEc:mtl:montde:2006-02
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    More about this item

    Keywords

    Committees; status-quo bias; interest-rate smoothing; dynamic voting;
    All these keywords.

    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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