Incentive Schemes for Central Bankers Under Uncertainty: Inflation Targets Versus Contracts
Bank of England Working Paper No. 88
33 Pages Posted: 4 Mar 1999
Date Written: 1998
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: Suggested Citation