Incentive Contracts for Central Bankers under Uncertainty: Walsh-Svensson Non-Equivalence Revisited

E. Schaling, M.M. Hoeberichts, S.C.W. Eijffinger

Research output: Working paperDiscussion paperOther research output

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Abstract

We look at the implications of uncertain monetary policy preferences for the targeting and contracting approach to monetary stability. It turns out that in presence of uncertain preferences a linear incentive contract in the sense of Walsh (1995) performs better in terms of social welfare than an explicit inflation target as proposed by Svensson (1997). The reason is that, although both approaches can get rid of the inflationary bias, the impact of uncertain preferences on the variance of inflation will be considerably higher with an inflation target. We also find that on top of an optimal linear contract or target, a quadratic contract, in the sense of Rogoff's (1985) "weight-conservative" central banker, improves the outcome. In the case of an inflation target, a more conservative banker is needed than with a Walsh contract.
Original languageEnglish
Place of PublicationTilburg
PublisherMacroeconomics
Number of pages25
Volume1998-11
Publication statusPublished - 1998

Publication series

NameCentER Discussion Paper
Volume1998-11

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Incentive contracts
Uncertainty
Equivalence
Bankers
Inflation target
Monetary stability
Inflation
Targeting
Social welfare
Monetary policy
Contracting

Keywords

  • non-linearities
  • economic fluctuations
  • inflation targets
  • optimal contracts

Cite this

Schaling, E., Hoeberichts, M. M., & Eijffinger, S. C. W. (1998). Incentive Contracts for Central Bankers under Uncertainty: Walsh-Svensson Non-Equivalence Revisited. (CentER Discussion Paper; Vol. 1998-11). Tilburg: Macroeconomics.
Schaling, E. ; Hoeberichts, M.M. ; Eijffinger, S.C.W. / Incentive Contracts for Central Bankers under Uncertainty : Walsh-Svensson Non-Equivalence Revisited. Tilburg : Macroeconomics, 1998. (CentER Discussion Paper).
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Schaling, E, Hoeberichts, MM & Eijffinger, SCW 1998 'Incentive Contracts for Central Bankers under Uncertainty: Walsh-Svensson Non-Equivalence Revisited' CentER Discussion Paper, vol. 1998-11, Macroeconomics, Tilburg.

Incentive Contracts for Central Bankers under Uncertainty : Walsh-Svensson Non-Equivalence Revisited. / Schaling, E.; Hoeberichts, M.M.; Eijffinger, S.C.W.

Tilburg : Macroeconomics, 1998. (CentER Discussion Paper; Vol. 1998-11).

Research output: Working paperDiscussion paperOther research output

TY - UNPB

T1 - Incentive Contracts for Central Bankers under Uncertainty

T2 - Walsh-Svensson Non-Equivalence Revisited

AU - Schaling, E.

AU - Hoeberichts, M.M.

AU - Eijffinger, S.C.W.

N1 - Pagination: 25

PY - 1998

Y1 - 1998

N2 - We look at the implications of uncertain monetary policy preferences for the targeting and contracting approach to monetary stability. It turns out that in presence of uncertain preferences a linear incentive contract in the sense of Walsh (1995) performs better in terms of social welfare than an explicit inflation target as proposed by Svensson (1997). The reason is that, although both approaches can get rid of the inflationary bias, the impact of uncertain preferences on the variance of inflation will be considerably higher with an inflation target. We also find that on top of an optimal linear contract or target, a quadratic contract, in the sense of Rogoff's (1985) "weight-conservative" central banker, improves the outcome. In the case of an inflation target, a more conservative banker is needed than with a Walsh contract.

AB - We look at the implications of uncertain monetary policy preferences for the targeting and contracting approach to monetary stability. It turns out that in presence of uncertain preferences a linear incentive contract in the sense of Walsh (1995) performs better in terms of social welfare than an explicit inflation target as proposed by Svensson (1997). The reason is that, although both approaches can get rid of the inflationary bias, the impact of uncertain preferences on the variance of inflation will be considerably higher with an inflation target. We also find that on top of an optimal linear contract or target, a quadratic contract, in the sense of Rogoff's (1985) "weight-conservative" central banker, improves the outcome. In the case of an inflation target, a more conservative banker is needed than with a Walsh contract.

KW - non-linearities

KW - economic fluctuations

KW - inflation targets

KW - optimal contracts

M3 - Discussion paper

VL - 1998-11

T3 - CentER Discussion Paper

BT - Incentive Contracts for Central Bankers under Uncertainty

PB - Macroeconomics

CY - Tilburg

ER -

Schaling E, Hoeberichts MM, Eijffinger SCW. Incentive Contracts for Central Bankers under Uncertainty: Walsh-Svensson Non-Equivalence Revisited. Tilburg: Macroeconomics. 1998. (CentER Discussion Paper).