Incentive Schemes for Central Bankers Under Uncertainty: Inflation Targets Versus Contracts

Bank of England Working Paper No. 88

33 Pages Posted: 4 Mar 1999

See all articles by Eric Schaling

Eric Schaling

Rand Afrikaans University - Department of Economics; Bank of England

Marco Hoeberichts

De Nederlandsche Bank - Research Department

Sylvester C. W. Eijffinger

Tilburg University (CentER) - Department of Economics; CESifo (Center for Economic Studies and Ifo Institute); Centre for Economic Policy Research (CEPR)

Date Written: 1998

Abstract

The implications of uncertain policy preferences for the targeting and contracting approaches to monetary policy are investigated. It is shown that, in the presence of uncertain preferences, a linear incentive contract in the sense of Walsh performs better than an explicit inflation target as proposed by Svensson. The reason is that an inflation target produces a higher variance of inflation. It is also shown that it is optimal to offer a linear inflation contract that does not depend on the degree of preference uncertainty.

JEL Classification: E42, E52, E58

Suggested Citation

Schaling, Eric and Hoeberichts, Marco M. and Eijffinger, Sylvester C. W., Incentive Schemes for Central Bankers Under Uncertainty: Inflation Targets Versus Contracts (1998). Bank of England Working Paper No. 88. Available at SSRN: https://ssrn.com/abstract=143236 or http://dx.doi.org/10.2139/ssrn.143236

Eric Schaling (Contact Author)

Rand Afrikaans University - Department of Economics ( email )

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Marco M. Hoeberichts

De Nederlandsche Bank - Research Department ( email )

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Sylvester C. W. Eijffinger

Tilburg University (CentER) - Department of Economics ( email )

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Netherlands
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+31 13 466 3042 (Fax)

CESifo (Center for Economic Studies and Ifo Institute)

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Germany

HOME PAGE: http://www.CESifo.de

Centre for Economic Policy Research (CEPR)

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United Kingdom

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