Inflation Forecast Contracts

Gersbach, Hans; Hahn, Volker

doi:10.2139/ssrn.1898569

Inflation Forecast Contracts

24 Pages Posted: 30 Jul 2011

Hans Gersbach

ETH Zurich - CER-ETH -Center of Economic Research; IZA Institute of Labor Economics; CESifo (Center for Economic Studies and Ifo Institute); Centre for Economic Policy Research (CEPR)

Volker Hahn

University of Konstanz

There are 2 versions of this paper

Date Written: July 29, 2011

Abstract

We introduce a new type of incentive contract for central bankers: inflation forecast contracts, which make central bankers’ remunerations contingent on the precision of their inflation forecasts. We show that such contracts enable central bankers to influence inflation expectations more effectively, thus facilitating more successful stabilization of current inflation. Inflation forecast contracts improve the accuracy of inflation forecasts, but have adverse consequences for output. On balance, paying central bankers according to their forecasting performance improves welfare.

Keywords: central banks, incentive contracts, transparency, inflation targeting, inflation forecast targeting, intermediate targets

JEL Classification: E58

Suggested Citation: Suggested Citation

Gersbach, Hans and Hahn, Volker, Inflation Forecast Contracts (July 29, 2011). Available at SSRN: https://ssrn.com/abstract=1898569 or http://dx.doi.org/10.2139/ssrn.1898569