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Central Bank Self-Selection Contracts and the Inflationary Bias under Preference Uncertainty

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  • Juan Cristóbal Campoy
  • Francisco Candel-Sánchez
  • Juan Carlos Negrete

Abstract

We analyze the optimal incentive scheme for a central bank in the presence of inflationary bias in discretionary monetary policy when the monetary authority's preferences are private information. In the proposed mechanism, the government designs a menu of contracts such that the central bank's choice reveals its type. As a result, rational private agents correctly anticipate the central bank's inflation behavior and avoid inflation-expectation errors arising from preference uncertainty. Under this screening mechanism, the inflationary bias is eliminated for the central-bank type that places a high value on the contract. By contrast, when this valuation is low, the bias is only partially reduced, unless the transfer to the central bank is costless for the government, in which case the bias is eliminated for both types.

Suggested Citation

  • Juan Cristóbal Campoy & Francisco Candel-Sánchez & Juan Carlos Negrete, 2026. "Central Bank Self-Selection Contracts and the Inflationary Bias under Preference Uncertainty," International Economic Journal, Taylor & Francis Journals, vol. 40(2), pages 298-314, April.
    • Handle: RePEc:taf:intecj:v:40:y:2026:i:2:p:298-314
    DOI: 10.1080/10168737.2026.2650787
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