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This work is based on chapter 2 of my PhD thesis at the LSE. I would like to thank my advisor, Kosuke Aoki, for his invaluable advice and continued support. I am grateful to friends and faculty members at the LSE and colleagues at the IMF for their insightful comments. Francesco Caselli, Valerie Cerra, Eric Clifton, Tom Cunningham, Enrica Detragiache, Aytek Malkhozov, Alex Mourmouras, Chris Pissarides, Kevin Sheedy, Silvana Tenreyro and David Webb were among them. All errors are mine.
As Blinder (1998) points out, if all members of an MPC are identical it does not matter whether decisions are made by an individual or by a committee. What differentiates monetary outcomes under a committee vs. under an individual policy maker in this model is that MPC members start their tenures at different periods.
This is inherent to the monetary policy problem. Note that both xt and πt are control variables, and not pre-determined by period t − 1 decisions.
This result relies on the assumption that the monetary authority (or the MPC) has a loss function spanning an infinite horizon. This condition is not satisfied in the overlapping generations model presented, where each MPC member’s loss function spans only a finite period. See Debortoli and Nunes (2007).
As is customary in such problems, we assume that the monetary authority decides the inflation level desired and the corresponding it is uniquely determined from the IS equation.
The utilitarian solution considered here satisfies the property of independence of utility origins (IUO). This means that the bargaining solution does not depend on absolute scales of utility. Therefore, our choice of u* does not matter, and in fact, we can suppress the term u* in the definition of f.
This condition is equivalent to a constant churning rate.
Note that the bargaining outcome is strictly preferred to the discretionary policy as long as the churning rate is less than 100%.
This low value is derived from a micro-founded model which approximates the loss function as a second-order expansion of the utility function of the representative consumer. It is therefore consistent with the rest of the structural parameters.
This method eliminates the need to specify the standard deviation of the cost-push shock.
We are assuming that there are no shocks to the natural interest rate.
Since we have assumed away demand shocks, setting inflation or interest rate as monetary targets are equivalent.