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Abstract

This paper develops an institutional explanation based on strategic, heterogeneous committee members for the phenomenon of inertia in monetary policy rates, by exploring variations of a game-theoretic two-period, two-player bargaining model with an endogenous status quo. The results show that inertial policy-making can arise from heterogeneity in preferences and that gridlock and policy inefficiency can become more likely due to variability in agenda-setting power, or decreases in uncertainty over the future. These conclusions are shown to accord with the empirical evidence on monetary policy setting by committees at major central banks over the last decade.

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