Monetary policy decisions are typically characterized by three features: (i) decisions are made by a committee, (ii) the committee members often disagree, and (iii) the chairman is almost never on the losing side in the vote. We show that the combination of overconfident policymakers and a...

We suggest that overconfidence among policymakers explains why formal decision power over monetary policy is given to committees, while much of the real power to set policy remains with central bank chairmen. Overconfidence implies that the chairman underweights advice from his staff, increasing...

This paper develops a basic model for output fluctuations in traded and non-traded sectors under two alternative monetary policy regimes; exchange rate targeting (or monetary union) and inflation targeting. The conventional wisdom from one-sector models says that inflation targeting gives better...

Business cycles are rarely fully synchronized across sectors. This may be a result of asymmetric shocks, or divergent responses to symmetric shocks, such as monetary policy shocks. If there is imperfect risk-sharing across sectors, there is an argument for letting the central bank stabilize...

Several countries face the choice between targeting inflation independently or entering a monetary union that targets inflation. The present paper extends the theory of optimum currency areas to deal with this choice. In contrast to the conventional theory, countries are shown to form more of an...

The paper discusses the role of fiscal policy as an instrument for macroeconomic stabilisation when monetary policy pursues inflation targeting. Within a theoretical model of an open economy with a traded and non-traded sector, we show that inflation targeting may lead to large sectoral...

We suggest that overconfidence among policymakers explains why formal decision power over monetary policy is given to committees, while much of the real power to set policy remains with central bank chairmen. Overconfidence implies that the chairman underweights advice from his staff, increasing...

A discretionary monetary policy leads to suboptimal stabilization in models with the New Keynesian assumption of forward-looking price setting, and various policy rules that improve the discretionary equilibrium have been considered in the literature. The empirical evidence for forward-looking...