Non-linear Incentives and Intertemporal Consistency in Inflation Targeting Regimes

Fernando Barros Jr., William Leite and Marcos Ribeiro

International Economic Journal, 2025, vol. 39, issue 2, 264-273

Abstract: This paper examines the institutional setup of an inflation targeting system where the Central Bank determines the target. Building on Walsh (1995, Optimal contracts for central bankers. The American Economic Review, 150–167), we show that, unlike the traditional solution, the incentive contract that induces an intertemporally consistent solution is not linear and may depend on the level of inflation or the deviation from the announced target to punish the Central Bank.

Date: 2025
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DOI: 10.1080/10168737.2025.2481624

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