Inflation forecast contracts

Hans Gersbach and Volker Hahn

Journal of Economic Dynamics and Control, 2014, vol. 48, issue C, 26-40

Abstract: We introduce a new type of incentive contract for central bankers: inflation forecast contracts, which make central bankers׳ remunerations contingent on the precision of their inflation forecasts. We show that such contracts enable central bankers to influence inflation expectations more effectively, thus facilitating more successful stabilization of current inflation. Inflation forecast contracts improve the accuracy of inflation forecasts, but have adverse consequences for output. On balance, paying central bankers according to their forecasting performance improves welfare. Optimal inflation forecast contracts stipulate high rewards for accurate forecasts.

Keywords: Central banks; Incentive contracts; Transparency; Forward guidance; Inflation targeting; Intermediate targets (search for similar items in EconPapers)
JEL-codes: E58 (search for similar items in EconPapers)
Date: 2014
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Citations: View citations in EconPapers (5)

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Related works:
Working Paper: Inflation Forecast Contracts (2012)
Working Paper: Inflation Forecast Contracts (2011)
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Persistent link: https://EconPapers.repec.org/RePEc:eee:dyncon:v:48:y:2014:i:c:p:26-40

DOI: 10.1016/j.jedc.2014.07.009

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