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Monetary Delegation: Credibility through Dynamic Incentives

Published on: May 2008​
Genre: Economics/Finance​ Category: Research Report/ Research Paper/ White Paper​
This paper studies delegation of monetary policy to an independent but accountable Central Banker. In a setting with a dynamic expectations augmented Phillips curve and adjustment costs to the Central Banker’s reputation, we describe a credible institutional arrangement that allows the government to circumvent its dynamic inconsistency problem. When adjustment costs are negligible, we show that delegation generates an equilibrium in?ation plan identical to the precommitment path. This result holds for a wide range of Central Banker’s preferences. Furthermore, the government is able to achieve perfect commitment in the steady state when steady state adjustment costs are nil.

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