Inflation Targets and Contracts with Uncertain Central Banker Preferences
AbstractWithin a standard model of monetary delegation the authors show that the optimal linear inflation contract performs strictly better than the optimal inflation target when there is uncertainty about the central banker's preferences. The optimal combination of a contract and a target performs best and eliminates the inflation bias and any variability not associated with supply shocks. However, variability due to shocks is enhanced by uncertain central banker preferences. Quadratic contracts are shown to overcome this problem partly, but the advantages of delegation may still be dominated by the 'excess variability' due to shocks. Hence, the credibility-stabilization tradeoff is restored.
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Bibliographic InfoArticle provided by Blackwell Publishing in its journal Journal of Money, Credit and Banking.
Volume (Year): 30 (1998)
Issue (Month): 3 (August)
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Web page: http://www.blackwellpublishing.com/journal.asp?ref=0022-2879
Other versions of this item:
- Beetsma, R.M.W.J. & Jensen, H., 1996. "Inflation targets and contracts with uncertain central banker preferences," Discussion Paper 1996-93, Tilburg University, Center for Economic Research.
- Beetsma, Roel & Jensen, Henrik, 1997. "Inflation Targets and Contracts with Uncertain Central Banker Preferences," CEPR Discussion Papers 1562, C.E.P.R. Discussion Papers.
- E42 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Monetary Sytsems; Standards; Regimes; Government and the Monetary System
- E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
- E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies
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