DP1386 Rogoff's 'Conservative' Central Banker Restored
|Author(s):||Berthold Herrendorf, Ben Lockwood|
|Publication Date:||April 1996|
|Keyword(s):||Conservative Central Banker, Delegation, Incomplete Information|
|Programme Areas:||International Macroeconomics|
|Link to this Page:||cepr.org/active/publications/discussion_papers/dp.php?dpno=1386|
This paper shows that delegation of monetary policy to a weight-conservative central banker is optimal, although the government can also use an inflation contract, an employment target, an inflation target, or any combination of these, to control the central banker. The key feature of our model is a stochastic inflation bias, arising when wage-setters receive some information about a supply shock prior to signing nominal wage contracts. Weight-conservatism is shown to be desirable if the stochastic inflation bias cannot be eliminated by optimal choice of the delegation parameters.