DP1348 | State-contingent Inflation Contracts and Output Persistence

Author(s)

Publication Date

18/03/1996

JEL Code(s)

Keyword(s)

Programme Area(s)

Abstract

This paper shows that the government can achieve its precommitment outcome in monetary policy when output follows an autoregressive process, by offering the central banker a linear inflation contract, and where the parameters of the contract depend on lagged output. This note therefore offers an extension of the recent results of Walsh to the case of persistence in real economic variables such as output or unemployment