Equilibrium Contracts for the Central Bank of a Monetary Union

18 Pages Posted: 9 Feb 2001

See all articles by Avinash Dixit

Avinash Dixit

Princeton University - Department of Economics; CESifo (Center for Economic Studies and Ifo Institute)

Henrik Jensen

University of Copenhagen - Department of Economics; Centre for Economic Policy Research (CEPR)

Date Written: December 2000

Abstract

We consider the political economy of a monetary union where member governments attempt to influence the policy of the common central bank. Modeling this as a common agency with incentive contracts, we show that if incentives are all that matters for the bank, the equilibrium implements a weighted average of the countries' most preferred policy. We then argue that making the bank inflation averse and/or attentive towards the countries' economic developments is undesirable in this context.

Keywords: Monetary Union, Incentive Contracts, Common Agency

JEL Classification: E52, E58, F33, F42

Suggested Citation

Dixit, Avinash K. and Jensen, Henrik, Equilibrium Contracts for the Central Bank of a Monetary Union (December 2000). Available at SSRN: https://ssrn.com/abstract=255370

Avinash K. Dixit

Princeton University - Department of Economics ( email )

Princeton, NJ 08544-1021
United States
609-258-4000 (Phone)
609-258-6419 (Fax)

CESifo (Center for Economic Studies and Ifo Institute)

Poschinger Str. 5
Munich, DE-81679
Germany

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

Henrik Jensen (Contact Author)

University of Copenhagen - Department of Economics ( email )

Ă˜ster Farimagsgade 5
Bygning 26
1353 Copenhagen K.
Denmark
+45 35 323 043 (Phone)
+45 35 323 000 (Fax)

HOME PAGE: http://hjeconomics.dk

Centre for Economic Policy Research (CEPR)

London
United Kingdom

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