Abstract

Independent monetary policy committees are a simple way of attaining relatively low inflation without completely sacrificing an activist role for monetary policy. If central bankers' types are unknown, then for a wide range of parameters an independent committee achieves higher social welfare than either a zero-inflation rule or discretionary policy conducted by an opportunistic central banker. A key reason for the committee's superior performance is that committee members are relatively likely to opt for low inflation and building a reputation when shocks are small. When large shocks hit the economy, the incentive to react outweighs the reputationbuilding benefit.

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Additional Information

ISSN
1538-4616
Print ISSN
0022-2879
Pages
pp. 23-46
Launched on MUSE
2006-04-24
Open Access
No
Archive Status
Archived 2007
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