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Equilibrium Contracts for the Central Bank of a Monetary Union

  • Avinash Dixit
  • Henrik Jensen

We consider the political economy of a monetary union wheremember governments attempt to influence the policy of the commoncentral bank. Modeling this as a common agency with incentivecontracts, we show that if incentives are all that matters for the bank,the equilibrium implements a weighted average of the countries‘most preferred policy. We then argue that making the bank inflationaverse and/or attentive towards the countries‘ economicdevelopments is undesirable in this context.

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File URL: http://www.cesifo-group.de/portal/page/portal/DocBase_Content/WP/WP-CESifo_Working_Papers/wp-cesifo-2000/wp-cesifo-2000-12/400b.pdf
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Paper provided by CESifo Group Munich in its series CESifo Working Paper Series with number 400.

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Date of creation: 2000
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Handle: RePEc:ces:ceswps:_400
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  1. Torsten Persson & Guido Tabellini, 1996. "Monetary Cohabitation in Europe," NBER Working Papers 5532, National Bureau of Economic Research, Inc.
  2. Barro, Robert J. & Gordon, David B., 1983. "Rules, discretion and reputation in a model of monetary policy," Journal of Monetary Economics, Elsevier, vol. 12(1), pages 101-121.
  3. Lane, Philip R, 2000. " Asymmetric Shocks and Monetary Policy in a Currency Union," Scandinavian Journal of Economics, Wiley Blackwell, vol. 102(4), pages 585-604, December.
  4. Grossman, G.M. & Helpman, E., 1992. "Protection for Sale," Papers 162, Princeton, Woodrow Wilson School - Public and International Affairs.
  5. Jensen, Henrik, 2000. "Optimal monetary policy cooperation through state-independent contracts with targets," European Economic Review, Elsevier, vol. 44(3), pages 517-539, March.
  6. Jensen, Henrik, 1997. "Credibility of Optimal Monetary Delegation," American Economic Review, American Economic Association, vol. 87(5), pages 911-20, December.
  7. 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.
  8. McCallum, Bennett T, 1995. "Two Fallacies Concerning Central-Bank Independence," American Economic Review, American Economic Association, vol. 85(2), pages 207-11, May.
  9. Walsh, Carl E, 1995. "Optimal Contracts for Central Bankers," American Economic Review, American Economic Association, vol. 85(1), pages 150-67, March.
  10. Canzoneri, Matthew B. & Henderson, Dale W., 1988. "Is sovereign policymaking bad?," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 28(1), pages 93-140, January.
  11. Dixit, Avinash, 2001. "Games of monetary and fiscal interactions in the EMU," European Economic Review, Elsevier, vol. 45(4-6), pages 589-613, May.
  12. 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.
  13. Dixit, Avinash, 2000. "A Repeated Game Model of Monetary Union," Economic Journal, Royal Economic Society, vol. 110(466), pages 759-80, October.
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