Monetary Policy Delegation, Contract Costs and Contract Targets
Georgios E. Chortareas
University of Athens - Faculty of Economics; University of Essex - Department of Accounting, Finance & Management
Stephen M. Miller
University of Nevada, Las Vegas - Department of Economics; University of Connecticut - Department of Economics
Bulletin of Economic Research, Vol. 55, pp. 101-112, 2003
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.
Number of Pages in PDF File: 12Accepted Paper Series
Date posted: March 5, 2003
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