The Dynamic (In)efficiency of Monetary Policy by Committee
Series/Report no.Cahier de recherche #2006-02
- status-quo bias
- interest-rate smoothing
- dynamic voting
- [JEL:E58] Macroeconomics and Monetary Economics - Monetary Policy, Central Banking, and the Supply of Money and Credit - Central Banks and Their Policies
- [JEL:D02] Microeconomics - General - Institutions: Design, Formation, and Operations
- [JEL:E58] Macroéconomie et économie monétaire - Politique monétaire, banque centrale, masse monétaire et crédit - Banques centrales et leurs politiques
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.
RIBONI, Alessandro et RUGE-MURCIA, Francisco, «The Dynamic (In)efficiency of Monetary Policy by Committee», Cahier de recherche #2006-02, Département de sciences économiques, Université de Montréal, 2006, 33 pages.