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The Dynamic (In)Efficiency of Monetary Policy by Committee


  • We thank two anonymous referees and participants in the conference on New Developments in the Analysis of Monetary Policy and Institutions at Tel Aviv University (December 2005), the Meetings of the European Economic Association (Vienna, 2006), and seminars at the Board of Governors and the Bank of Canada for helpful comments. This research received the financial support of the Social Sciences and Humanities Research Council of Canada.


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.