Can inflation contract discipline central bankers when agents are learning?

Marine André and Meixing Dai ()

Working Papers of BETA from Bureau d'Economie Théorique et Appliquée, UDS, Strasbourg

Abstract: This paper studies how the government should design a linear inflation contract to deal with the time-inconsistency problem arising from incentives for the central bank to exploit the inflation-output tradeoff with an overambitious output-gap objective when private expectations are based on adaptive learning. An intertemporal tradeoff due to learning leads the central bank to accommodate less the effect of inflation expectations and cost-push shocks on inflation. An optimal linear inflation contract is able to achieve many of the benefits, i.e., reducing inflation bias and stabilization bias, resulting from central bank conservatism and inflation targeting rules. The government can impose either a long-term or a short-term contract. The first is equivalent to appointing a hawkish central banker. The second implies that inflation penalty rate should be adjusted for inflation expectations in each period, and could be positive or negative, i.e., the central banker should shift between hawkish and dovish stances depending on inflation expectations and the speed of learning.

Keywords: adaptive learning; inflation bias; stabilization bias; inflation contract; monetary policy delegation; central bank conservatism; optimal monetary policy. (search for similar items in EconPapers)
JEL-codes: C62 D83 D84 E52 E58 (search for similar items in EconPapers)
Date: 2017
New Economics Papers: this item is included in nep-cba, nep-mac and nep-mon
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

Downloads: (external link)
http://beta.u-strasbg.fr/WP/2017/2017-25.pdf (application/pdf)

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:ulp:sbbeta:2017-25

Access Statistics for this paper

More papers in Working Papers of BETA from Bureau d'Economie Théorique et Appliquée, UDS, Strasbourg Contact information at EDIRC.
Bibliographic data for series maintained by ( this e-mail address is bad, please contact ).