THE CARE AND HANDLING OF MONETARY AUTHORITIES*

Brendan O'Flaherty

Economics and Politics, 1990, vol. 2, issue 1, 25-44

Abstract: Sometimes a group of people want to hire some agent (a monetary authority, for instance) to force them to cooperate with one another. This can cause problems, not only of the standard principal‐agent type, but also of inconsistency, which appears here as renegotiation. The group faces a conflict between controlling the agent – the agency problem – and controlling themselves – the inconsistency problem. Terms of office are a good way to resolve this problem, and in fact, for people patient enough, the renegotiation problem disappears. This model provides insights into why the public dislikes inflation, why the market for presidents does not clear in Walrasian fashion, and why the controversy about “rules versus discretion” provides no policy guidance.

Date: 1990
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