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Inflation Contracts and Inflation Targets under Uncertainty: Why We Might Need Conservative Central Bankers
Author(s) -
Muscatelli V. Anton
Publication year - 1999
Publication title -
economica
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 1.532
H-Index - 65
eISSN - 1468-0335
pISSN - 0013-0427
DOI - 10.1111/1468-0335.00167
Subject(s) - inflation (cosmology) , economics , delegation , central bank , discretion , monetary economics , inflation targeting , monetary policy , physics , management , theoretical physics , political science , law
This paper compares the relative effectiveness of inflation contracts and inflation targets in the presence of uncertainty regarding the central bank’s preferences and the underlying output target. The model explains why discretion may be superior to a delegation solution. We also show that there might be the need to combine inflation targets and contracts with the appointment of a Rogoff‐type ‘conservative’ central banker if contracts and targets cannot be made state‐contingent, and that less flexible inflation targets may be appropriate with uncertain central bank preferences.