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Optimal Inflation Contracts and Inflation Targets with Uncertain Central Bank Preferences: Accountability through Independence?

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  • Muscatelli, Anton

Abstract

This paper examines some problems that arise when monetary policy is delegated to an independent central bank and where the central bank's preferences are unknown. Two key conclusions emerge from the paper. First, even with optimal targets or contracts, central bank independence may not always be desirable because central banks may have distorted preferences relative to society. Second, if the delegation solution is preferable and the independent central bank responds to information about supply shocks, the central bank may be made more accountable by allowing it to set its own inflation targets, i.e., by making it goal-independent.

Suggested Citation

  • Muscatelli, Anton, 1998. "Optimal Inflation Contracts and Inflation Targets with Uncertain Central Bank Preferences: Accountability through Independence?," Economic Journal, Royal Economic Society, vol. 108(447), pages 529-542, March.
    • Handle: RePEc:ecj:econjl:v:108:y:1998:i:447:p:529-42
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