Optimal Central Banker Contracts and Common Agency

Georgios Chortareas and Stephen Miller

Public Choice, 2004, vol. 121, issue 1, 155 pages

Abstract: This paper considers the contracting approach to centralbanking in a simple common agency model. We suggest thatcentral banker contracts that do not consider the possibilityof more than one principal existing are incomplete contracts.Such incomplete contracts can be a poor form ofmonetary policy delegation under common agency. We develop amodel with two principals – society (government) and ageneric interest group, whose objective conflicts withsociety’s ex ante preferences by incorporating an inflationarybias. We determine when the government-offered orinterest-group-offered contract dominates the central banker’sdecision. The results largely depend on whether theinterest-group-offered contract is written in terms of outputor inflation. Copyright Kluwer Academic Publishers 2004

Date: 2004
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DOI: 10.1007/s11127-004-6159-9

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