The Walsh Contracts for Central Bankers Are Optimal After All!

Georgios Chortareas and Stephen Miller

No 2006-14, Working papers from University of Connecticut, Department of Economics

Abstract: Candel-Sanchez and Campoy-Minarro (2004) argue that the Walsh linear inflation contract does not prove optimal when the government concerns itself about the cost of the central bank contract. This result relies on the authors. assumption that the participation constraint does not represent an effective constraint on the central banker's decision. Instead, the government can "impose" or "force" the contract on the central banker, even though the contract violates the participation constraint. We argue that such a contract does not make sense. The government can impose it, but it does not affect the central banker's incentives. The policy outcomes do not match those of commitment. Then we show that the Walsh linear inflation contract does produce the optimal outcome, even when the government cares about the cost of the contract.

Keywords: central banks; contracts; Walsh (search for similar items in EconPapers)
JEL-codes: E42 E52 E58 (search for similar items in EconPapers)
Pages: 16 pages
Date: 2006-04
New Economics Papers: this item is included in nep-cba, nep-mac and nep-mon
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Published in Public Choice, April 2007

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Persistent link: https://EconPapers.repec.org/RePEc:uct:uconnp:2006-14

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