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Optimal Monetary Policy with Overlapping Generations of Policymakers

Maral Shamloo

No 2010/032, IMF Working Papers from International Monetary Fund

Abstract: In this paper I study the effect of imperfect central bank commitment on inflationary outcomes. I present a model in which the monetary authority is a committee that consists of members who serve overlapping, finite terms. Older and younger generations of Monetary Policy Committee (MPC) members decide on policy by engaging in a bargaining process. I show that this setup gives rise to a continuous measure of the degree of monetary authority's commitment. The model suggests that the lower the churning rate or the longer the tenure time, the closer social welfare will be to that under optimal commitment policy.

Keywords: WP; MPC member; monetary policy; objective function; standard deviation; Monetary Policy Committee; Commitment; Discretion; Optimal Monetary Policy; loss function; inflation-output gap trade-off; output gap volatility; cost-push shock; member tenure; efficient frontier; members result; Output gap; Inflation (search for similar items in EconPapers)
Pages: 36
Date: 2010-02-01
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