DP1348 State-contingent Inflation Contracts and Output Persistence

Author(s): Ben Lockwood
Publication Date: March 1996
Keyword(s): Inflation Contracts, Monetary Policy, Output Persistence
JEL(s): E52
Programme Areas: International Macroeconomics
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=1348

This paper shows that the government can achieve its precommitment outcome in monetary policy when output follows an autoregressive process, by offering the central banker a linear inflation contract, and where the parameters of the contract depend on lagged output. This note therefore offers an extension of the recent results of Walsh to the case of persistence in real economic variables such as output or unemployment