The Dynamic (In)efficiency of Monetary Policy by Committee

Alessandro Riboni () and Francisco J. Ruge-Murcia ()

Cahiers de recherche from Universite de Montreal, Departement de sciences economiques

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.

Keywords: Committees; status-quo bias; interest-rate smoothing; dynamic voting (search for similar items in EconPapers)
JEL-codes: E58 D02 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-cba, nep-cdm, nep-mac, nep-mon and nep-pol
Date: Written 2006
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http://hdl.handle.net/1866/553 (application/pdf)

Related works:
Working Paper: The Dynamic (In)efficiency of Monetary Policy by Committee (2006)
Journal Article: The Dynamic (In)Efficiency of Monetary Policy by Committee (2008)
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