Discussion Paper Details

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Title: Inflation Forecast Contracts

Author(s): Hans Gersbach and Volker Hahn

Publication Date: April 2012

Keyword(s): central banks, incentive contracts, inflation forecast targeting, inflation targeting, intermediate targets and transparency

Programme Area(s): International Macroeconomics

Abstract: We introduce a new type of incentive contract for central bankers: inflation forecast contracts, which make central bankers? remunerations contingent on the precision of their inflation forecasts. We show that such contracts enable central bankers to influence inflation expectations more effectively, thus facilitating more successful stabilization of current inflation. Inflation forecast contracts improve the accuracy of inflation forecasts, but have adverse consequences for output. On balance, paying central bankers according to their forecasting performance improves welfare. Optimal inflation forecast contracts stipulate high rewards for accurate forecasts.

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Bibliographic Reference

Gersbach, H and Hahn, V. 2012. 'Inflation Forecast Contracts'. London, Centre for Economic Policy Research.