Optimal Inflation Targets, “Conservative” Central Banks, and Linear Inflation Contracts: Comment

Inflation Band Targeting and Optimal Inflation Contracts

Comment on Bennett T. McCallum’s Should Central Banks Raise their Inflation Targets?

McCallum’s answers his question by saying that raising this target is a “sophisticated but predominantly bad idea” and the paper gives eight reasons for this conclusion. The first is that inflation is a particularly distortionary tax. The second is that, with sticky prices, inflation can lead to inefficient changes in relative prices. The third is that, based on the analysis of Schmitt-Grohé an...

Inflation Targets and Inflation Targeting

There is widespread agreement that price stability (in practice, low and stable inflation) should be an objective of monetary policy. This agreement is reflected both in the mandates set for monetary policy by governments and in the practice of central banks. Several other important questions about the objectives for monetary policy are less settled: Should there be other objectives? If there a...

Inflation , Growth and Central Banks : Theory and Evidence

Inflation forecast contracts

We introduce a new type of incentive contract for central bankers: inflation forecast contracts, which make central bankers' remunerations contingent on the precision of their inflation forecasts. We show that such contracts enable central bankers to influence inflation expectations more effectively, thus facilitating more successful stabilization of current inflation. Inflation forecast contra...