Optimal Central Banker Contracts and Common Agency

Georgios Chortareas and Stephen Miller

No 2000-03, Working papers from University of Connecticut, Department of Economics

Abstract: This paper considers the contacting approach to central banking in the context of a simple common agency model. The recent literature on optimal contracts suggests that the political principal of the central bank can design the appropriate incentive schemes that remedy for time-inconsistency problems in monetary policy. The effectiveness of such contracts, however, requires a central banker that attaches a positive weight to the incentive scheme. As a result, delegating monetary policy under such circumstances gives rise to the possibility that the central banker may respond to incentive schemes offered by other potential principals. We introduce common agency considerations in the design of optimal central banker contracts. We introduce two principals - society (government) and an interest group, whose objectives conflict with society's and we examine under what circumstances the government-offered or the interest-group-offered contract dominates. Our results largely depend on the type of bias that the interest group contract incorporates. In particular, when the interest group contract incorporates an inflationary bias the outcome depends on the principals' relative concern of the incentive schemes' costs. When the interest group contract incorporates an expansionary bias, however, it always dominates the government contract. A corollary of our results is that central banker contracts aiming to remove the expansionary bias of policymakers should be written explicitly in terms of the perceived bias.

Keywords: central banker contracts; common agency; inflation bias (search for similar items in EconPapers)
JEL-codes: E42 E52 E58 (search for similar items in EconPapers)
Pages: 30 pages
Date: 2000, Revised 2002-06
References: Add references at CitEc
Citations: View citations in EconPapers (2)

Published in Public Choice, Octover 2004

Downloads: (external link)
https://media.economics.uconn.edu/working/2000-03.pdf Full text (application/pdf)

Related works:
Journal Article: Optimal Central Banker Contracts and Common Agency (2004)
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:uct:uconnp:2000-03

Access Statistics for this paper

More papers in Working papers from University of Connecticut, Department of Economics University of Connecticut 365 Fairfield Way, Unit 1063 Storrs, CT 06269-1063. Contact information at EDIRC.
Bibliographic data for series maintained by Mark McConnel ().