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The Dynamic (In)Efficiency of Monetary Policy by Committee
Author(s) -
RIBONI ALESSANDRO,
RUGEMURCIA FRANCISCO J.
Publication year - 2008
Publication title -
journal of money, credit and banking
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 1.763
H-Index - 108
eISSN - 1538-4616
pISSN - 0022-2879
DOI - 10.1111/j.1538-4616.2008.00144.x
Subject(s) - voting , value (mathematics) , monetary policy , economics , autocorrelation , preference , power (physics) , econometrics , variable (mathematics) , microeconomics , monetary economics , statistics , political science , politics , mathematics , law , mathematical analysis , physics , quantum mechanics
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.