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Optimal Central Banker Contracts and Common Agency

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  • Georgios E. Chortareas

    (Bank of England)

  • Stephen M. Miller

    (University of Connecticut)

Abstract

This paper considers the contacting approach to central banking in the context of a simple common agency model. The recent literature on optimal contracts suggests that the political principal of the central bank can design the appropriate incentive schemes that remedy for time-inconsistency problems in monetary policy. The effectiveness of such contracts, however, requires a central banker that attaches a positive weight to the incentive scheme. As a result, delegating monetary policy under such circumstances gives rise to the possibility that the central banker may respond to incentive schemes offered by other potential principals. We introduce common agency considerations in the design of optimal central banker contracts. We introduce two principals - society (government) and an interest group, whose objectives conflict with society's and we examine under what circumstances the government-offered or the interest-group-offered contract dominates. Our results largely depend on the type of bias that the interest group contract incorporates. In particular, when the interest group contract incorporates an inflationary bias the outcome depends on the principals' relative concern of the incentive schemes' costs. When the interest group contract incorporates an expansionary bias, however, it always dominates the government contract. A corollary of our results is that central banker contracts aiming to remove the expansionary bias of policymakers should be written explicitly in terms of the perceived bias.

Suggested Citation

  • Georgios E. Chortareas & Stephen M. Miller, 2000. "Optimal Central Banker Contracts and Common Agency," Working papers 2000-03, University of Connecticut, Department of Economics, revised Jun 2002.
  • Handle: RePEc:uct:uconnp:2000-03
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    References listed on IDEAS

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    Citations

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    Cited by:

    1. Graham Mallard, 2014. "Static Common Agency And Political Influence: An Evaluative Survey," Journal of Economic Surveys, Wiley Blackwell, vol. 28(1), pages 17-35, February.
    2. Giuseppe Ciccarone & Enrico Marchetti, 2012. "Optimal linear contracts under common agency and uncertain central bank preferences," Public Choice, Springer, vol. 150(1), pages 263-282, January.
    3. Enrico MARCHETTI & Giuseppe CICCARONE, "undated". "Linear Contracts, Common Agency and Central Bank Preference Uncertainty," EcoMod2008 23800083, EcoMod.
    4. Ibrahim L. Awad, 2008. "Towards measurement of political pressure on central banks: the case of the central bank of egypt," Prague Economic Papers, University of Economics, Prague, vol. 2008(3), pages 254-275.
    5. Margrethe Aanesen & Claire Armstrong, 2013. "Stakeholder Influence and Optimal Regulations: A Common-Agency Analysis of Ecosystem-Based Fisheries Regulations," Journal of Institutional and Theoretical Economics (JITE), Mohr Siebeck, Tübingen, vol. 169(2), pages 320-338, June.
    6. Eleftherios Spyromitros, 2014. "The link between transparency and independence of central banks," Journal of Risk & Control, Risk Market Journals, vol. 1(1), pages 51-60.

    More about this item

    Keywords

    central banker contracts; common agency; inflation bias;

    JEL classification:

    • E42 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Monetary Sytsems; Standards; Regimes; Government and the Monetary System
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies

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