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Is the Walsh Contract Really Optimal?

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  • Francisco Candel-Sánchez

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  • Juan Cristóbal Campoy-Miñarroy
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    Abstract

    The purpose of this paper is to show that the linear penalization to inflation found in Walsh (1995) is not the government's optimal choice when the fixed part of the transfer scheme is any given constant and the payment to the central bank represents a cost for the government.

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    Article provided by Springer in its journal Public Choice.

    Volume (Year): 120 (2004)
    Issue (Month): 1_2 (07)
    Pages: 29-39

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    Handle: RePEc:kap:pubcho:v:120:y:2004:i:1_2:p:29-39
    Contact details of provider: Web page: http://www.springerlink.com/link.asp?id=100332

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    1. Lars E.O. Svensson, 1995. "Optimal Inflation Targets, `Conservative' Central Banks, and Linear Inflation Contracts," NBER Working Papers 5251, National Bureau of Economic Research, Inc.
    2. Beetsma, Roel M W J & Jensen, Henrik, 1998. "Inflation Targets and Contracts with Uncertain Central Banker Preferences," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 30(3), pages 384-403, August.
    3. Robert J. Barro & David B. Gordon, 1983. "Rules, Discretion and Reputation in a Model of Monetary Policy," NBER Working Papers 1079, National Bureau of Economic Research, Inc.
    4. Walsh, Carl E, 1995. "Optimal Contracts for Central Bankers," American Economic Review, American Economic Association, vol. 85(1), pages 150-67, March.
    5. Kydland, Finn E & Prescott, Edward C, 1977. "Rules Rather Than Discretion: The Inconsistency of Optimal Plans," Journal of Political Economy, University of Chicago Press, vol. 85(3), pages 473-91, June.
    6. Eijffinger, Sylvester & Hoeberichts, Marco & Schaling, Eric, 2000. " Optimal Central Bank Conservativeness in an Open Economy," Public Choice, Springer, vol. 105(3-4), pages 339-55, December.
    7. Maurice Obstfeld & Kenneth S. Rogoff, 1996. "Foundations of International Macroeconomics," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262150476, June.
    8. Rogoff, Kenneth, 1985. "The Optimal Degree of Commitment to an Intermediate Monetary Target," The Quarterly Journal of Economics, MIT Press, vol. 100(4), pages 1169-89, November.
    9. Beetsma, Roel M W J & Bovenberg, Lans, 2001. " When Does an Inflation Target Yield the Second Best?," Scandinavian Journal of Economics, Wiley Blackwell, vol. 103(1), pages 119-26, March.
    10. Herrendorf, Berthold & Lockwood, Ben, 1997. "Rogoff's "Conservative" Central Banker Restored," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 29(4), pages 476-95, November.
    11. Canzoneri, Matthew B & Nolan, Charles & Yates, Anthony, 1997. "Mechanisms for Achieving Monetary Stability: Inflation Targeting versus the ERM," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 29(1), pages 46-60, February.
    12. Muscatelli, V Anton, 1999. "Inflation Contracts and Inflation Targets under Uncertainty: Why We Might Need Conservative Central Bankers," Economica, London School of Economics and Political Science, vol. 66(262), pages 241-54, May.
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    Cited by:

    1. Dai, Meixing & Spyromitros, Eleftherios, 2012. "Inflation contract, central bank transparency and model uncertainty," Economic Modelling, Elsevier, vol. 29(6), pages 2371-2381.
    2. Giuseppe Ciccarone & Enrico Marchetti, 2008. "Linear Contracts, Common Agency and Central Bank Preference Uncertainty," Working Papers 115, University of Rome La Sapienza, Department of Public Economics.
    3. Georgios E. Chortareas & Stephen M. Miller, 2006. "The Walsh Contracts for Central Bankers Are Optimal After All!," Working papers 2006-14, University of Connecticut, Department of Economics.

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    1. Carl E. Walsh in Wikipedia English ne '')

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