Credibility and Flexibility with Independent Monetary Policy Committees

Ilian Mihov and Anne Sibert

Journal of Money, Credit and Banking, 2006, vol. 38, issue 1, 23-46

Abstract: Independent monetary policy committees are a simple way of attaining relatively low inflation without completely sacrificing an activist role for monetary policy. If central bankers' types are unknown, then for a wide range of parameters an independent committee achieves higher social welfare than either a zero-inflation rule or discretionary policy conducted by an opportunistic central banker. A key reason for the committee's superior performance is that committee members are relatively likely to opt for low inflation and building a reputation when shocks are small. When large shocks hit the economy, the incentive to react outweighs the reputation-building benefit.

Date: 2006
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Persistent link: https://EconPapers.repec.org/RePEc:mcb:jmoncb:v:38:y:2006:i:1:p:23-46

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