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Monetary Policy Delegation, Contract Costs and Contract Targets
Author(s) -
Chortareas Georgios E.,
Miller Stephen M.
Publication year - 2003
Publication title -
bulletin of economic research
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.227
H-Index - 29
eISSN - 1467-8586
pISSN - 0307-3378
DOI - 10.1111/1467-8586.00164
Subject(s) - delegation , inflation (cosmology) , economics , contract management , government (linguistics) , value (mathematics) , function (biology) , monetary economics , microeconomics , philosophy , physics , management , machine learning , evolutionary biology , theoretical physics , computer science , biology , linguistics
We reconsider the optimal central banker contract derived in Walsh (1995). We show that if the government's objective function places weight (value) on the cost of the contract, then the optimal inflation contract does not completely neutralize the inflation bias. Furthermore, the more concerned the government is about the cost of the contract or the less selfish is the central banker, the smaller is the share of the inflation bias eliminated by the contract. Finally, a central banker contract written in terms of output can completely eradicate the inflationary bias, regardless of concerns about contract costs.