Professor of Economics
Journal Article | Journal of Money, Credit and Banking | 38 | February 2006
Credibility and Flexibility with Monetary Policy Committees
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, 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 quite 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 reputation-building benefit.