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Time Consistency in Dynamic Bargaining: The Role of Committees as Substitutes for Commitment

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  • Alessandro Riboni

Abstract

\QTR{it}{The standard framework to study time consistency assumes that economic decisions are made by one legislator. In this paper policies are negotiated in a committee by playing a dynamic voting game. The implications of this change are remarkable: the social optimum becomes time consistent. While concentration of powers in a single legislator creates credibility problems, we show that separation of powers yields commitment. The main focus of the paper is on the time consistency of monetary policy when decisions are made in a monetary committee, such as the F.O.M.C. or the European Central Bank. We prove that making decisions inside a committee works as a substitute for a commitment technology. Notice that this result may hold even when }$all$\QTR{it}{\ legislators in the committee have a one-shot incentive to deviate from the ex-ante optimal plan. Last, we provide normative prescriptions regarding the identity of the agenda setter and the location of the initial status quo necessary to implement the utilitarian optimum

Suggested Citation

  • Alessandro Riboni, 2004. "Time Consistency in Dynamic Bargaining: The Role of Committees as Substitutes for Commitment," 2004 Meeting Papers 684, Society for Economic Dynamics.
  • Handle: RePEc:red:sed004:684
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    Cited by:

    1. Emanuel Kohlscheen, 2010. "Sovereign risk: constitutions rule," Oxford Economic Papers, Oxford University Press, vol. 62(1), pages 62-85, January.
    2. Montoro, Carlos, 2007. "Monetary policy committees and interest rate smoothing," LSE Research Online Documents on Economics 19752, London School of Economics and Political Science, LSE Library.
    3. Francesco Salsano, 2005. "Monetary Policy in the Presence Of Imperfect Observability Of The Objectives Of Central Bankers," Birkbeck Working Papers in Economics and Finance 0523, Birkbeck, Department of Economics, Mathematics & Statistics.
    4. Carlos Montoro, 2007. "Why Central Banks Smooth Interest Rates? A Political Economy Explanation," Working Papers 2007-003, Banco Central de Reserva del PerĂº.

    More about this item

    Keywords

    Time Consistency; Voting; Committees;

    JEL classification:

    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies
    • D71 - Microeconomics - - Analysis of Collective Decision-Making - - - Social Choice; Clubs; Committees; Associations
    • D72 - Microeconomics - - Analysis of Collective Decision-Making - - - Political Processes: Rent-seeking, Lobbying, Elections, Legislatures, and Voting Behavior

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