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Optimal contracts for central bankers: a note

Author

Listed:
  • Juan Cristóbal Campoy

    (Universidad de Murcia)

  • Juan Carlos Negrete

    (Universidad de Murcia)

Abstract

Walsh (1995) was the first author to find a full solution to the problem of time inconsistency in monetary policy, namely, a contract that eliminates the inflation bias without incurring any output stabilization costs. We provide an alternative method for obtaining such an optimal contract. Its components are shown explicitly to be derived from a constrained optimization problem which is solved by applying the Kuhn-Tucker conditions to a muti-stage game. We also conclude that there are more socially optimal contracts apart from the one considered by Walsh (1995).

Suggested Citation

  • Juan Cristóbal Campoy & Juan Carlos Negrete, 2014. "Optimal contracts for central bankers: a note," Economics Bulletin, AccessEcon, vol. 34(2), pages 1283-1290.
    • Handle: RePEc:ebl:ecbull:eb-13-00146
    as

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    References listed on IDEAS

    as
    1. Carl E. Walsh, 2010. "Monetary Theory and Policy, Third Edition," MIT Press Books, The MIT Press, edition 3, volume 1, number 0262013770, December.
    2. 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.
    3. Walsh, Carl E, 1995. "Optimal Contracts for Central Bankers," American Economic Review, American Economic Association, vol. 85(1), pages 150-167, March.
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    JEL classification:

    • E5 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit

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