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The Dynamic (In)efficiency of Monetary Policy by Committee

Author

Listed:
  • Alessandro Riboni
  • Francisco Ruge-Murcia

    (Economics University of Montreal)

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 inefficient 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

Suggested Citation

  • Alessandro Riboni & Francisco Ruge-Murcia, 2006. "The Dynamic (In)efficiency of Monetary Policy by Committee," 2006 Meeting Papers 206, Society for Economic Dynamics.
    • Handle: RePEc:red:sed006:206
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    References listed on IDEAS

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    More about this item

    Keywords

    Committees; status-quo bias; interest-rate smoothing; dynamic voting;
    All these keywords.

    JEL classification:

    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies
    • D02 - Microeconomics - - General - - - Institutions: Design, Formation, Operations, and Impact

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