The Walsh contract for central bankers proves optimal after all!

Georgios Chortareas and Stephen Miller

Public Choice, 2007, vol. 131, issue 1, 243-247

Abstract: A recent paper argues that the Walsh linear inflation contract does not prove optimal when the government concerns itself about the cost of the central bank contract (Candel-Sánchez & Campoy-Miñarro, 2004). This result relies on assuming that the participation constraint does not represent an effective constraint on the central banker’s decision. We show that the Walsh linear inflation contract does produce the optimal outcome, even when the government cares about the cost of the contract, assuming that the participation constraint holds. Copyright Springer Science+Business Media, LLC 2007

Keywords: Central banks; Optimal contracts (search for similar items in EconPapers)
Date: 2007
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Citations: View citations in EconPapers (6)

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DOI: 10.1007/s11127-006-9115-z

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