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The Walsh contract for central bankers proves optimal after all!

  • Georgios Chortareas

    ()

  • Stephen Miller

    ()

A recent paper argues that the Walsh linear inflation contract does not prove optimal when the government concerns itself about the cost of the central bank contract (Candel-Sánchez & Campoy-Miñarro, 2004). This result relies on assuming that the participation constraint does not represent an effective constraint on the central banker’s decision. We show that the Walsh linear inflation contract does produce the optimal outcome, even when the government cares about the cost of the contract, assuming that the participation constraint holds. Copyright Springer Science+Business Media, LLC 2007

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File URL: http://hdl.handle.net/10.1007/s11127-006-9115-z
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Article provided by Springer in its journal Public Choice.

Volume (Year): 131 (2007)
Issue (Month): 1 (April)
Pages: 243-247

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Handle: RePEc:kap:pubcho:v:131:y:2007:i:1:p:243-247
Contact details of provider: Web page: http://www.springerlink.com/link.asp?id=100332

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  1. Georgios E. Chortareas & Stephen M. Miller, 2003. "Monetary Policy Delegation, Contract Costs and Contract Targets," Bulletin of Economic Research, Wiley Blackwell, vol. 55(1), pages 101-112, January.
  2. Walsh, Carl E, 1995. "Optimal Contracts for Central Bankers," American Economic Review, American Economic Association, vol. 85(1), pages 150-67, March.
  3. Persson, Torsten & Tabellini, Guido, 1993. "Designing institutions for monetary stability," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 39(1), pages 53-84, December.
  4. Robert J. Barro & David B. Gordon, 1981. "A Positive Theory of Monetary Policy in a Natural-Rate Model," NBER Working Papers 0807, National Bureau of Economic Research, Inc.
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