Incentive Schemes for Central Bankers Under Uncertainty: Inflation Targets Versus Contracts
AbstractThe implications of uncertain policy preferences for the targeting and contracting approaches to monetary policy are investigated. It is shown that, in the presence of uncertain preferences, a linear incentive contract in the sense of Walsh performs better than an explicit inflation target as proposed by Svensson. The reason is that an inflation target produces a higher variance of inflation. It is also shown that itis optimal to offer a linear inflation contract that does not depend on the degree of preference uncertainty.
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Bibliographic InfoPaper provided by Tilburg University in its series Open Access publications from Tilburg University with number urn:nbn:nl:ui:12-78562.
Date of creation: 1998
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Other versions of this item:
- Eric Schaling & Marco Hoeberichts & Sylvester Eijffinger, 1998. "Incentive schemes for central bankers under uncertainty: inflation targets versus contracts," Bank of England working papers 88, Bank of England.
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