Inflation Targets and Contracts with Uncertain Central Banker Preferences
Within a standard model of monetary delegation we show that the optimal linear inflation contract performs strictly better than the optimal inflation target when there is uncertainty about the central banker’s preferences. The optimal combination of a contract and a target performs best, and eliminates the inflation bias and any variability not associated with supply shocks. Variability due to shocks is enhanced by uncertain central banker preferences however, which suggests the need for alternative incentive mechanisms. Quadratic contracts are shown to partly overcome the problem. Still, the advantages of delegation may be dominated by the ‘excess variability’ due to shocks.
|Date of creation:||Jan 1997|
|Date of revision:|
|Contact details of provider:|| Postal: |
Phone: 44 - 20 - 7183 8801
Fax: 44 - 20 - 7183 8820
|Order Information:|| Email: |
References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Backus, David & Driffill, John, 1985.
"Inflation and Reputation,"
American Economic Review,
American Economic Association, vol. 75(3), pages 530-38, June.
- Carl E. Walsh, 1994.
"Is New Zealand's Reserve Bank Act of 1989 an optimal central bank contract?,"
Pacific Basin Working Paper Series
94-01, Federal Reserve Bank of San Francisco.
- Walsh, Carl E, 1995. "Is New Zealand's Reserve Bank Act of 1989 an Optimal Central Bank Contract?," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 27(4), pages 1179-91, November.
- Svensson, Lars E O, 1997.
"Optimal Inflation Targets, "Conservative" Central Banks, and Linear Inflation Contracts,"
American Economic Review,
American Economic Association, vol. 87(1), pages 98-114, March.
- Svensson, Lars E O, 1995. "Optimal Inflation Targets, 'Conservative' Central Banks, and Linear Inflation Contracts," CEPR Discussion Papers 1249, C.E.P.R. Discussion Papers.
- Svensson, L.E.O., 1995. "Optimal Inflation Targets, 'Conservative' Central Banks, and Linear Inflation Contracts," Papers 595, Stockholm - International Economic Studies.
- Lars E.O. Svensson, 1995. "Optimal Inflation Targets, `Conservative' Central Banks, and Linear Inflation Contracts," NBER Working Papers 5251, National Bureau of Economic Research, Inc.
- Alesina, Alberto & Gatti, Roberta, 1995. "Independent Central Banks: Low Inflation at No Cost?," American Economic Review, American Economic Association, vol. 85(2), pages 196-200, May.
- Kydland, Finn E & Prescott, Edward C, 1977. "Rules Rather Than Discretion: The Inconsistency of Optimal Plans," Journal of Political Economy, University of Chicago Press, vol. 85(3), pages 473-91, June.
- Lockwood, Ben & Miller, Marcus & Zhang, Lei, 1998.
"Designing Monetary Policy When Unemployment Persists,"
London School of Economics and Political Science, vol. 65(259), pages 327-45, August.
- Lockwood, B. & Miller, M. & Zhang, L., 1994. "Designing Monetary Policy when Unemployment Persists," Discussion Papers 9408, Exeter University, Department of Economics.
- Thomas Havrilesky & John Gildea, 1991. "Screening Fomc Members For Their Biases And Dependability," Economics and Politics, Wiley Blackwell, vol. 3(2), pages 139-149, 07.
- Herrendorf, Berthold & Lockwood, Ben, 1996.
"Rogoff's 'Conservative' Central Banker Restored,"
CEPR Discussion Papers
1386, C.E.P.R. Discussion Papers.
- Herrendorf, Berthold & Lockwood, Ben, 1996. "Rogoff's Conservative Central Banker Restored," The Warwick Economics Research Paper Series (TWERPS) 450, University of Warwick, Department of Economics.
- Waller, Christopher J & Walsh, Carl E, 1996. "Central-Bank Independence, Economic Behavior, and Optimal Term Lengths," American Economic Review, American Economic Association, vol. 86(5), pages 1139-53, December.
- Cukierman, Alex & Meltzer, Allan H, 1986. "A Theory of Ambiguity, Credibility, and Inflation under Discretion and Asymmetric Information," Econometrica, Econometric Society, vol. 54(5), pages 1099-1128, September.
- Vickers, John, 1986. "Signalling in a Model of Monetary Policy with Incomplete Information," Oxford Economic Papers, Oxford University Press, vol. 38(3), pages 443-55, November.
- Lohmann, Susanne, 1992. "Optimal Commitment in Monetary Policy: Credibility versus Flexibility," American Economic Review, American Economic Association, vol. 82(1), pages 273-86, March.
- Stanley Fischer, 1995. "Modern Approaches to Central Banking," NBER Working Papers 5064, National Bureau of Economic Research, Inc.
- Lossani, Marco & Natale, Piergiovanna & Tirelli, Patrizio, 1998. "Incomplete Information in Monetary Policy Games: Rules Rather Than a Conservative Central Banker," Scottish Journal of Political Economy, Scottish Economic Society, vol. 45(1), pages 33-47, February.
- 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.
- Maurice Obstfeld & Kenneth S. Rogoff, 1996. "Foundations of International Macroeconomics," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262150476, June.
- Jean-Jacques Laffont & Jean Tirole, 1993. "A Theory of Incentives in Procurement and Regulation," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262121743, June.
When requesting a correction, please mention this item's handle: RePEc:cpr:ceprdp:1562. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: ()The email address of this maintainer does not seem to be valid anymore. Please ask to update the entry or send us the correct address
If references are entirely missing, you can add them using this form.