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Equilibrium Contracts for the Central Bank of a Monetary Union

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  • Avinash Dixit
  • Henrik Jensen

Abstract

We consider the political economy of a monetary union where member governments attempt to influence the policy of the common central bank. Modeling this as a common agency with incentive contracts, we show that if incentives are all that matters for the bank, the equilibrium implements a weighted average of the countries‘ most preferred policy. We then argue that making the bank inflation averse and/or attentive towards the countries‘ economic developments is undesirable in this context.

Suggested Citation

  • Avinash Dixit & Henrik Jensen, 2000. "Equilibrium Contracts for the Central Bank of a Monetary Union," CESifo Working Paper Series 400, CESifo.
    • Handle: RePEc:ces:ceswps:_400
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    References listed on IDEAS

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    12. Jensen, Henrik, 1997. "Credibility of Optimal Monetary Delegation," American Economic Review, American Economic Association, vol. 87(5), pages 911-920, December.
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    14. Jensen, Henrik, 2000. "Optimal monetary policy cooperation through state-independent contracts with targets," European Economic Review, Elsevier, vol. 44(3), pages 517-539, March.
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    Cited by:

    1. Mihov, Ilian & Sibert, Anne, 2006. "Credibility and Flexibility with Independent Monetary Policy Committees," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 38(1), pages 23-46, February.
    2. Hans Gersbach & Bernhard Pachl, 2009. "Flexible Majority Rules for Central Banks," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 41(2-3), pages 507-516, March.
    3. Sousa, Pedro A. B. de, 2001. "Independent and Accountable Central Banks and the European Central Bank," European Integration online Papers (EIoP), European Community Studies Association Austria (ECSA-A), vol. 5, July.
    4. Georgios Chortareas & Stephen Miller, 2004. "Optimal Central Banker Contracts and Common Agency," Public Choice, Springer, vol. 121(1), pages 131-155, October.
    5. Kobayashi, Teruyoshi, 2005. "A model of monetary unification under asymmetric information," International Review of Economics & Finance, Elsevier, vol. 14(1), pages 1-15.
    6. Sibert, Anne, 2002. "Monetary policy with uncertain central bank preferences," European Economic Review, Elsevier, vol. 46(6), pages 1093-1109, June.
    7. Dixit, Avinash, 2001. "Games of monetary and fiscal interactions in the EMU," European Economic Review, Elsevier, vol. 45(4-6), pages 589-613, May.
    8. Ilian Mihov & Anne Sibert, 2002. "Credibility and Flexibility with Monetary Policy Committees," Working Papers 232002, Hong Kong Institute for Monetary Research.
    9. Enrico MARCHETTI & Giuseppe CICCARONE, 2008. "Linear Contracts, Common Agency and Central Bank Preference Uncertainty," EcoMod2008 23800083, EcoMod.
    10. Carl E. Walsh, 2002. "When should central bankers be fired?," Economics of Governance, Springer, vol. 3(1), pages 1-21, March.
    11. Hans Peter Grüner & Alexandra Kiel, 2001. "Collective decisions with interdependent valuations," GK working paper series 2001-02, Post Graduate Programme "Allocation on Financial Markets", University of Mannheim, revised Sep 2001.
    12. Gruner, Hans Peter & Kiel, Alexandra, 2004. "Collective decisions with interdependent valuations," European Economic Review, Elsevier, vol. 48(5), pages 1147-1168, October.
    13. Piotr Stanek, 2004. "How to assess proposals for enlargement reform of the European Central Bank," Revue de l'OFCE, Presses de Sciences-Po, vol. 91(5), pages 209-239.
    14. Debora Di Gioacchino & Sergio Ginebri & Laura Sabani, 2008. "Sovereign Debt Capacity and the Distribution of Domestic Wealth: A Common Agency Model," Review of International Economics, Wiley Blackwell, vol. 16(4), pages 798-813, September.
    15. Grüner, Hans Peter & Kiel, Alexandra, 2001. "Collective Decisions with Interdependent Valuations," CEPR Discussion Papers 3003, C.E.P.R. Discussion Papers.

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