The Time Inconsistency of Delegation-Based Time Inconsistency Solutions in Monetary Policy

Abstract : A prominent solution to the time-inconsistency problem inherent to monetary policymaking consists of delegating monetary policy to an independent central bank by an appropriately designed inflation contract or target. This paper shows that delegation is not a solution to this problem: optimal delegation requires commitment and is not time-consistent, while time-consistent delegation is suboptimal. We prove these results formally in a popular dynamic model of monetary policy. Introducing costs of reappointing the central banker can only solve this problem if the government is infinitely averse to changing central bank's contract.
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Journal of Optimization Theory and Applications, Springer Verlag, 2011, 150 (3), pp.657-674. 〈10.1007/s10957-011-9847-x〉
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Contributeur : Florin Bilbiie <>
Soumis le : lundi 12 septembre 2011 - 22:07:13
Dernière modification le : mardi 30 janvier 2018 - 17:50:02

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Florin Bilbiie. The Time Inconsistency of Delegation-Based Time Inconsistency Solutions in Monetary Policy. Journal of Optimization Theory and Applications, Springer Verlag, 2011, 150 (3), pp.657-674. 〈10.1007/s10957-011-9847-x〉. 〈hal-00622870〉

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