Optimal Monetary Policy with Overlapping Generations of Policymakers
IMF Working Papers, February 1, 2010
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Bibliographic details
- Authors: Maral Shamloo
- Published: February 1, 2010
- Series: IMF Working Papers
- DOI: https://doi.org/10.5089/9781451962642.001
Research question and model setup
- Studies the effect of imperfect central bank commitment on inflationary outcomes.
- Monetary authority modeled as a committee (Monetary Policy Committee, MPC) composed of members who serve overlapping, finite terms.
- Older and younger generations of MPC members decide on policy via a bargaining process.
- Model generates a continuous measure of the degree of the monetary authority's commitment.
Key findings
- The model implies that the degree of commitment depends on committee composition dynamics (churning rate and tenure).
- Lower churning rate or longer tenure time makes social welfare closer to that under optimal commitment policy.
- Bargaining between older and younger MPC members alters inflationary outcomes relative to full commitment or pure discretion.
Policy implications and interpretations
- Policies that reduce member turnover (lower churning rate) or extend member tenure can improve welfare by approximating optimal commitment.
- Institutional design of MPCs (tenure length, reappointment/turnover rules) matters for inflation-output trade-offs and loss function outcomes.
- Consideration of intergenerational bargaining dynamics is important when assessing imperfect commitment environments.
Technical scope and keywords
- Subject: Inflation, Output gap, Prices, Production, Technology
- Keywords: Commitment, cost-push shock, Discretion, efficient frontier, Inflation, inflation-output gap trade-off, loss function, member tenure, members result, monetary policy, Monetary Policy Committee, MPC member, objective function, Optimal Monetary Policy, Output gap, output gap volatility, standard deviation, WP