The Time Inconsistency of Delegation-Based Time Inconsistency Solutions in Monetary Policy

Florin Bilbiie

Journal of Optimization Theory and Applications, 2011, vol. 150, issue 3, No 12, 657-674

Abstract: Abstract A prominent solution to the time-inconsistency problem inherent to monetary policymaking consists of delegating monetary policy to an independent central bank by an appropriately designed inflation contract or target. This paper shows that delegation is not a solution to this problem: optimal delegation requires commitment and is not time-consistent, while time-consistent delegation is suboptimal. We prove these results formally in a popular dynamic model of monetary policy. Introducing costs of reappointing the central banker can only solve this problem if the government is infinitely averse to changing central bank’s contract.

Keywords: Time-inconsistency; Commitment; Optimal delegation; Inflation contracts and targets; Monetary policy; Central banking (search for similar items in EconPapers)
Date: 2011
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

Downloads: (external link)
http://link.springer.com/10.1007/s10957-011-9847-x Abstract (text/html)
Access to the full text of the articles in this series is restricted.

Related works:
Working Paper: The Time Inconsistency of Delegation-Based Time Inconsistency Solutions in Monetary Policy (2011)
Working Paper: The Time Inconsistency of Delegation-Based Time Inconsistency Solutions in Monetary Policy (2011)
Working Paper: The Time Inconsistency of Delegation-Based Time Inconsistency Solutions in Monetary Policy (2011)
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:spr:joptap:v:150:y:2011:i:3:d:10.1007_s10957-011-9847-x

Ordering information: This journal article can be ordered from
http://www.springer. ... cs/journal/10957/PS2

DOI: 10.1007/s10957-011-9847-x

Access Statistics for this article

Journal of Optimization Theory and Applications is currently edited by Franco Giannessi and David G. Hull

More articles in Journal of Optimization Theory and Applications from Springer
Bibliographic data for series maintained by Sonal Shukla () and Springer Nature Abstracting and Indexing ().