State-Contingent Inflation Contracts and Unemployment Persistence
This paper shows that, if unemployment (or some other real variable) follows a dynamic autoregressive process, the government can still achieve its precommitment outcome in monetary policy by offering the central banker a linear inflation contract, where the penalty for incremental inflation depends positively on lagged unemployment. This note, therefore, offers an extension of recent results of C. Walsh (1995) to the case of persistence in real economic variables such as output or unemployment. Copyright 1997 by Ohio State University Press.
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Volume (Year): 29 (1997)
Issue (Month): 3 (August)
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