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The Dynamic (In)efficiency of Monetary Policy by Committee

  • RIBONI, Alessandro
  • RUGE-MURCIA, Francisco

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.

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Paper provided by Centre interuniversitaire de recherche en économie quantitative, CIREQ in its series Cahiers de recherche with number 02-2006.

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Length: 33 pages
Date of creation: 2006
Date of revision:
Handle: RePEc:mtl:montec:02-2006
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  16. Sibert, Anne, 1999. "Monetary Policy Committees: Individual and Collective Reputations," CEPR Discussion Papers 2328, C.E.P.R. Discussion Papers.
  17. Dal Bo, Ernesto, 2006. "Committees with supermajority voting yield commitment with flexibility," Journal of Public Economics, Elsevier, vol. 90(4-5), pages 573-599, May.
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