Inflation Targets and Contracts with Uncertain Central Banker Preferences

Roel Beetsma and Henrik Jensen

No 1562, CEPR Discussion Papers from C.E.P.R. Discussion Papers

Abstract: Within a standard model of monetary delegation we show that the optimal linear inflation contract performs strictly better than the optimal inflation target when there is uncertainty about the central banker’s preferences. The optimal combination of a contract and a target performs best, and eliminates the inflation bias and any variability not associated with supply shocks. Variability due to shocks is enhanced by uncertain central banker preferences however, which suggests the need for alternative incentive mechanisms. Quadratic contracts are shown to partly overcome the problem. Still, the advantages of delegation may be dominated by the ‘excess variability’ due to shocks.

Keywords: Inflation Contracts; Inflation Targets; Monetary delegration; Uncertainty (search for similar items in EconPapers)
JEL-codes: E42 E52 E58 (search for similar items in EconPapers)
Date: 1997-01
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Citations: View citations in EconPapers (4)

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Related works:
Journal Article: Inflation Targets and Contracts with Uncertain Central Banker Preferences (1998)
Working Paper: Inflation targets and contracts with uncertain central banker preferences (1996)
Working Paper: Inflation targets and contracts with uncertain central banker preferences (1996)
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