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

Details

Serval ID
serval:BIB_F34EB4319361
Type
Article: article from journal or magazin.
Collection
Publications
Title
The Time Inconsistency of Delegation-Based Time Inconsistency Solutions in Monetary Policy
Journal
Journal of Optimization Theory and Applications
Author(s)
Bilbiie F.O.
ISSN
0022-3239
1573-2878
Publication state
Published
Issued date
09/2011
Peer-reviewed
Oui
Volume
150
Number
3
Pages
657-674
Language
english
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.
Keywords
Time-inconsistency, Commitment, Optimal delegation, Inflation contracts and targets, Monetary policy, Central banking
Web of science
Create date
01/11/2018 10:34
Last modification date
20/08/2019 16:20
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