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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. Persson, Torsten & Tabellini, Guido, 1993. "Designing institutions for monetary stability," Carnegie-Rochester Conference Series on Public Policy, Elsevier, Elsevier, vol. 39(1), pages 53-84, December.
  2. Matthew B. Canzoneri, 1983. "Monetary policy games and the role of private information," International Finance Discussion Papers, Board of Governors of the Federal Reserve System (U.S.) 249, Board of Governors of the Federal Reserve System (U.S.).
  3. Barro, Robert J. & Gordon, David B., 1983. "Rules, discretion and reputation in a model of monetary policy," Journal of Monetary Economics, Elsevier, Elsevier, vol. 12(1), pages 101-121.
  4. Robert J. Barro & David B. Gordon, 1981. "A Positive Theory of Monetary Policy in a Natural-Rate Model," NBER Working Papers 0807, National Bureau of Economic Research, Inc.
  5. Svensson, Lars E O, 1995. "Optimal Inflation Targets, 'Conservative' Central Banks, and Linear Inflation Contracts," CEPR Discussion Papers, C.E.P.R. Discussion Papers 1249, C.E.P.R. Discussion Papers.
  6. McCallum, Bennett T., 1997. "Crucial issues concerning central bank independence," Journal of Monetary Economics, Elsevier, Elsevier, vol. 39(1), pages 99-112, June.
  7. Bennett T. McCallum, 1995. "Two Fallacies Concerning Central Bank Independence," NBER Working Papers 5075, National Bureau of Economic Research, Inc.
  8. Walsh, Carl E, 1995. "Optimal Contracts for Central Bankers," American Economic Review, American Economic Association, American Economic Association, vol. 85(1), pages 150-67, March.
  9. Lohmann, Susanne, 1992. "Optimal Commitment in Monetary Policy: Credibility versus Flexibility," American Economic Review, American Economic Association, American Economic Association, vol. 82(1), pages 273-86, March.
  10. Rogoff, Kenneth, 1985. "The Optimal Degree of Commitment to an Intermediate Monetary Target," The Quarterly Journal of Economics, MIT Press, MIT Press, vol. 100(4), pages 1169-89, November.
  11. Michelle R. Garfinkel & Seonghwan Oh, 1990. "Strategic discipline in monetary policy with private information: optimal targeting periods," Working Papers, Federal Reserve Bank of St. Louis 1990-001, Federal Reserve Bank of St. Louis.
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Cited by:
  1. Huiping Yuan & Stephen M. Miller & Langnan Chen, 2009. "The Optimality and Controllability of Monetary Policy through Delegation with Consistent Targets," Working Papers, University of Nevada, Las Vegas , Department of Economics 0909, University of Nevada, Las Vegas , Department of Economics.
  2. Huiping Yuan & Stephen M. Miller & Langnan Chen, 2006. "The Making of Optimal and Consistent Policy: An Analytical Framework for Monetary Models," Working papers, University of Connecticut, Department of Economics 2006-05, University of Connecticut, Department of Economics, revised Jan 2009.
  3. Georgios E. Chortareas & Stephen M. Miller, 2002. "Central Banker Contracts, Incomplete Information, and Monetary Policy Surprises: In Search of a Selfish Central Banker?," Working papers, University of Connecticut, Department of Economics 2002-29, University of Connecticut, Department of Economics.
  4. Stephen M. Miller & Huiping Yuan, 2005. "Consistent Targets and Optimal Monetary Policy: Conservative Central Banker Redux," Working papers, University of Connecticut, Department of Economics 2005-55, University of Connecticut, Department of Economics, revised Jan 2009.
  5. Georgios E. Chortareas & Stephen M. Miller, 2000. "Optimal Central Banker Contracts and Common Agency," Working papers, University of Connecticut, Department of Economics 2000-03, University of Connecticut, Department of Economics, revised Jun 2002.
  6. Huiping Yuan & Stephen M. Miller, 2009. "The Making of Optimal and Consistent Policy: An Implementation Theory Framework for Monetary Policy," Working Papers, University of Nevada, Las Vegas , Department of Economics 0910, University of Nevada, Las Vegas , Department of Economics.
  7. Huiping Yuan & Stephen M. Miller, 2011. "The Optimality and Controllability of Discretionary Monetary Policy," Working papers, University of Connecticut, Department of Economics 2011-17, University of Connecticut, Department of Economics.
  8. Bennani, Hamza, 2014. "Does one word fit all? The asymmetric effects of central banks' communication policy," MPRA Paper 57150, University Library of Munich, Germany.
  9. Georgios Chortareas & Stephen Miller, 2007. "The Walsh contract for central bankers proves optimal after all!," Public Choice, Springer, Springer, vol. 131(1), pages 243-247, April.
  10. Giuseppe Ciccarone & Enrico Marchetti, 2012. "Optimal linear contracts under common agency and uncertain central bank preferences," Public Choice, Springer, Springer, vol. 150(1), pages 263-282, January.
  11. Georgios E. Chortareas & Stephen M. Miller, 2006. "The Walsh Contracts for Central Bankers Are Optimal After All!," Working papers, University of Connecticut, Department of Economics 2006-14, University of Connecticut, Department of Economics.

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