Inflation Forecast Contracts

Hans Gersbach and Volker Hahn

No 8933, CEPR Discussion Papers from C.E.P.R. Discussion Papers

Abstract: We introduce a new type of incentive contract for central bankers: inflation forecast contracts, which make central bankers? remunerations contingent on the precision of their inflation forecasts. We show that such contracts enable central bankers to influence inflation expectations more effectively, thus facilitating more successful stabilization of current inflation. Inflation forecast contracts improve the accuracy of inflation forecasts, but have adverse consequences for output. On balance, paying central bankers according to their forecasting performance improves welfare. Optimal inflation forecast contracts stipulate high rewards for accurate forecasts.

Keywords: Central banks; Incentive contracts; Inflation forecast targeting; Inflation targeting; Intermediate targets; transparency (search for similar items in EconPapers)
JEL-codes: E58 (search for similar items in EconPapers)
Date: 2012-04
New Economics Papers: this item is included in nep-cba, nep-cta, nep-for, nep-mac and nep-mon
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Citations: View citations in EconPapers (1)

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Related works:
Journal Article: Inflation forecast contracts (2014)
Working Paper: Inflation Forecast Contracts (2011)
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