The Dynamic (In)efficiency of Monetary Policy by Committee

39 Pages Posted: 22 May 2009

See all articles by Alessandro Riboni

Alessandro Riboni

Ecole Polytechnique, Paris - Laboratoire d'Econometrie

Francisco J. Ruge-Murcia

McGill University - Department of Economics; University of Montreal - Department of Economics; University of Montreal - Center for Interuniversity Research in Econometrics

Date Written: December 2007

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 helps explain the empirical observation that the distribution of actual interest rate changes has a mode of zero.

Keywords: status-quo bias, policy conservatism, policy inertia, gridlock interval, interest-rate smoothing

JEL Classification: E4, E5, D7

Suggested Citation

Riboni, Alessandro and Ruge-Murcia, Francisco J., The Dynamic (In)efficiency of Monetary Policy by Committee (December 2007). Available at SSRN: https://ssrn.com/abstract=1406438 or http://dx.doi.org/10.2139/ssrn.1406438

Alessandro Riboni (Contact Author)

Ecole Polytechnique, Paris - Laboratoire d'Econometrie ( email )

1 rue Descartes
Paris, 75005
France

Francisco J. Ruge-Murcia

McGill University - Department of Economics ( email )

855 Sherbrooke Street West
Montreal, QC H3A 2T7
Canada

University of Montreal - Department of Economics ( email )

C.P. 6128, succursale Centre-Ville
Montreal, Quebec H3C 3J7
Canada

University of Montreal - Center for Interuniversity Research in Econometrics ( email )

C.P. 6128, Succursale Centre-ville
Montreal, Quebec H3C 3J7
Canada

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