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Optimal Central Banker Contracts and Common Agency

  • Georgios Chortareas

    ()

  • Stephen Miller

    ()

This paper considers the contracting approach to centralbanking in a simple common agency model. We suggest thatcentral banker contracts that do not consider the possibilityof more than one principal existing are incomplete contracts.Such incomplete contracts can be a poor form ofmonetary policy delegation under common agency. We develop amodel with two principals – society (government) and ageneric interest group, whose objective conflicts withsociety’s ex ante preferences by incorporating an inflationarybias. We determine when the government-offered orinterest-group-offered contract dominates the central banker’sdecision. The results largely depend on whether theinterest-group-offered contract is written in terms of outputor inflation. Copyright Kluwer Academic Publishers 2004

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Article provided by Springer in its journal Public Choice.

Volume (Year): 121 (2004)
Issue (Month): 1 (October)
Pages: 131-155

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Handle: RePEc:kap:pubcho:v:121:y:2004:i:1:p:131-155
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