Recent results of research into optimal policy objectives of central banks (CB) suggest that there is no role for weight-conservatism in the delegation of CB tasks. In Discussion Paper No. 1386, Berthold Herrendorf and Research Fellow Ben Lockwood challenge these findings by strengthening Kenneth Rogoff's early suggestions that it is optimal to delegate CB tasks to a governor who is more averse to inflation than society. They argue that, once stochastic inflation bias and non-state-contingent task delegation are introduced into a standard model, there may well be a role for ‘weight conservatism’.

It is shown that with stochastic inflation bias the delegation decision of the government can only induce the CB to choose the government's precommited monetary policy rule if the delegation decision can be made contingent on the information received by the private sector, as revealed in the nominal wage (state-contingent task delegation). In contrast, if delegation is non-state contingent, then by choosing an inflation contract, inflation and/or employment targets can only drive the mean of inflation bias to zero, not the variance. The only way in which this variance can be lowered is by making the CB weight-conservative. Two additional arguments in favour of 'weight-conservatism' are presented. First, recent experience with inflation targets in a number of OECD countries indicates that they are designed only to be revised following major shocks. Second, it can be shown that if the private sector of the economy has two pieces of information about the structure of the economy, then, even when conditioning the delegation decision on the nominal wage, weight-conservatism is still desirable, as the nominal wage does not fully reveal both pieces of information to the government. This suggests that, in general, delegation cannot be made sufficiently state-contingent to obviate the need for weight-conservatism.