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Monetary Policy Delegation, Contract Costs and Contract Targets

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  • Georgios E. Chortareas

    (Bank of England)

  • Stephen M. Miller

    (University of Nevada Las Vegas)

Abstract

We reconsider the optimal central banker contract derived in Walsh (1995). We show that if the government"s objective function places weight (value) on the cost of the contract, then the optimal inflation contract does not completely neutralize the inflation bias. Furthermore, the more concerned the government is about the cost of the contract or the less selfish is the central banker, the smaller is the share of the inflation bias eliminated by the contract. Finally, a central banker contract written in terms of output can completely eradicate the inflationary bias, regardless of concerns about contract costs. Copyright Blackwell Publishing Ltd and the Board of Trustees of the Bulletin of Economic Research 2003

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Bibliographic Info

Article provided by Wiley Blackwell in its journal Bulletin of Economic Research.

Volume (Year): 55 (2003)
Issue (Month): 1 (January)
Pages: 101-112

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Handle: RePEc:bla:buecrs:v:55:y:2003:i:1:p:101-112

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  1. Barro, Robert J. & Gordon, David B., 1983. "Rules, discretion and reputation in a model of monetary policy," Journal of Monetary Economics, Elsevier, vol. 12(1), pages 101-121.
  2. Rogoff, Kenneth, 1985. "The Optimal Degree of Commitment to an Intermediate Monetary Target," The Quarterly Journal of Economics, MIT Press, vol. 100(4), pages 1169-89, November.
  3. Bennett T. McCallum, 1995. "Two Fallacies Concerning Central Bank Independence," NBER Working Papers 5075, National Bureau of Economic Research, Inc.
  4. Michelle R. Garfinkel & Seonghwan Oh, 1990. "Strategic discipline in monetary policy with private information: optimal targeting periods," Working Papers 1990-001, Federal Reserve Bank of St. Louis.
  5. McCallum, Bennett T., 1997. "Crucial issues concerning central bank independence," Journal of Monetary Economics, Elsevier, vol. 39(1), pages 99-112, June.
  6. Barro, Robert J & Gordon, David B, 1983. "A Positive Theory of Monetary Policy in a Natural Rate Model," Journal of Political Economy, University of Chicago Press, vol. 91(4), pages 589-610, August.
  7. Lohmann, Susanne, 1992. "Optimal Commitment in Monetary Policy: Credibility versus Flexibility," American Economic Review, American Economic Association, vol. 82(1), pages 273-86, March.
  8. Canzoneri, Matthew B, 1985. "Monetary Policy Games and the Role of Private Information," American Economic Review, American Economic Association, vol. 75(5), pages 1056-70, December.
  9. Svensson, Lars E O, 1995. "Optimal Inflation Targets, 'Conservative' Central Banks, and Linear Inflation Contracts," CEPR Discussion Papers 1249, C.E.P.R. Discussion Papers.
  10. Walsh, Carl E, 1995. "Optimal Contracts for Central Bankers," American Economic Review, American Economic Association, vol. 85(1), pages 150-67, March.
  11. Persson, Torsten & Tabellini, Guido, 1993. "Designing institutions for monetary stability," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 39(1), pages 53-84, December.
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Citations

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Cited by:
  1. Huiping Yuan & Stephen M. Miller, 2009. "The Making of Optimal and Consistent Policy: An Implementation Theory Framework for Monetary Policy," Working Papers 0910, University of Nevada, Las Vegas , Department of Economics.
  2. Chortareas, Georgios E & Miller, Stephen M, 2003. " Central Banker Contracts, Incomplete Information, and Monetary Policy Surprises: In Search of a Selfish Central Banker?," Public Choice, Springer, vol. 116(3-4), pages 271-95, September.
  3. Huiping Yuan & Stephen M. Miller & Langnan Chen, 2009. "The Optimality and Controllability of Monetary Policy through Delegation with Consistent Targets," Working Papers 0909, University of Nevada, Las Vegas , Department of Economics.
  4. Georgios Chortareas & Stephen Miller, 2007. "The Walsh contract for central bankers proves optimal after all!," Public Choice, Springer, vol. 131(1), pages 243-247, April.
  5. Giuseppe Ciccarone & Enrico Marchetti, 2012. "Optimal linear contracts under common agency and uncertain central bank preferences," Public Choice, Springer, vol. 150(1), pages 263-282, January.
  6. Georgios E. Chortareas & Stephen M. Miller, 2006. "The Walsh Contracts for Central Bankers Are Optimal After All!," Working papers 2006-14, University of Connecticut, Department of Economics.
  7. Georgios E. Chortareas & Stephen M. Miller, 2000. "Optimal Central Banker Contracts and Common Agency," Working papers 2000-03, University of Connecticut, Department of Economics, revised Jun 2002.
  8. Huiping Yuan & Stephen M. Miller & Langnan Chen, 2006. "The Making of Optimal and Consistent Policy: An Analytical Framework for Monetary Models," Working papers 2006-05, University of Connecticut, Department of Economics, revised Jan 2009.
  9. Huiping Yuan & Stephen M. Miller, 2011. "The Optimality and Controllability of Discretionary Monetary Policy," Working papers 2011-17, University of Connecticut, Department of Economics.
  10. Stephen M. Miller & Huiping Yuan, 2005. "Consistent Targets and Optimal Monetary Policy: Conservative Central Banker Redux," Working papers 2005-55, University of Connecticut, Department of Economics, revised Jan 2009.

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