Optimal Central Banker Contracts and Common Agency |
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Authors: | Georgios E. Chortareas Stephen M. Miller |
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Affiliation: | 1. International Economic Analysis Division, Monetary Analysis, HO-2 Bank of England, London, EC2R 8AH, U.K. 2. Department of Economics, University of Nevada, Las Vegas, NV, 89154-6005, U.S.A.
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Abstract: | This paper considers the contracting approach to centralbanking in a simple common agency model. We suggest thatcentral banker contracts that do not consider the possibilityof more than one principal existing are incomplete contracts.Such incomplete contracts can be a poor form ofmonetary policy delegation under common agency. We develop amodel with two principals – society (government) and ageneric interest group, whose objective conflicts withsociety’s ex ante preferences by incorporating an inflationarybias. We determine when the government-offered orinterest-group-offered contract dominates the central banker’sdecision. The results largely depend on whether theinterest-group-offered contract is written in terms of outputor inflation. |
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