Optimal Inflation Targets, Inflation Contracts and Political Cycles

Xiang Lin
Additional contact information
Xiang Lin: Dept. of Economics, Stockholm University

No 1997:12, Research Papers in Economics from Stockholm University, Department of Economics

Abstract: It has been widely accepted that politically induced variance can be generated when the wage contract is written before an election. In this paper, we show that inflation contracts and inflation targets can eliminate both the inflation bias and politically induced variance, if electoral uncertainty is merely due to different preferences. In contrast to the independent central bank that is based on cooperation between competing parties prior to the target can be delegated by the winning party after election. Concern for reputation can lead to the convergence of the inflation targets assigned by different parties. We also consider the case where uncertsinty is caused not only by different preferences, but also by different desired rates inflation. We show that it is quite possible to reduce inflation but increase the variances of inflation and output by adopting the inflation target regime.

Keywords: central bank independence; inflation contract; inflation target; and electoral uncertainty. (search for similar items in EconPapers)
JEL-codes: A10 (search for similar items in EconPapers)
Pages: 28 pages
Date: 1998-04-01
References: View references in EconPapers View complete reference list from CitEc
Citations:

Downloads: (external link)
http://www2.ne.su.se/paper/wp97_12.pdf (application/pdf)

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:hhs:sunrpe:1997_0012

Access Statistics for this paper

More papers in Research Papers in Economics from Stockholm University, Department of Economics Department of Economics, Stockholm, S-106 91 Stockholm, Sweden. Contact information at EDIRC.
Bibliographic data for series maintained by Anne Jensen ( this e-mail address is bad, please contact ).