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Equilibrium Contracts for the Central Bank of a Monetary Union

Avinash Dixit () and Henrik Jensen ()

No 400, CESifo Working Paper Series from CESifo Group Munich

Abstract: We consider the political economy of a monetary union where member governments attempt to influence the policy of the common central bank. Modeling this as a common agency with incentive contracts, we show that if incentives are all that matters for the bank, the equilibrium implements a weighted average of the countries‘ most preferred policy. We then argue that making the bank inflation averse and/or attentive towards the countries‘ economic developments is undesirable in this context.

Date: 2000
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