The Walsh contract for central bankers proves optimal after all! |
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Authors: | Georgios E Chortareas Stephen M Miller |
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Institution: | 1. Department of Accounting, Finance, and Management, University of Essex, Colchester, CO4 3SQ, UK 2. Department of Economics, University of Nevada, Las Vegas, Las Vegas, NV, 89154-6005, USA
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Abstract: | A recent paper argues that the Walsh linear inflation contract does not prove optimal when the government concerns itself about the cost of the central bank contract (Candel-Sánchez & Campoy-Miñarro, 2004). This result relies on assuming that the participation constraint does not represent an effective constraint on the central banker’s decision. We show that the Walsh linear inflation contract does produce the optimal outcome, even when the government cares about the cost of the contract, assuming that the participation constraint holds. |
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