Monetary Delegation: Credibility through Dynamic Incentives

| Sep. 01, 2010

This paper analyzes delegation of monetary policy to an independent but accountable Central Banker (CB) in a setting with a dynamic Phillips curve. The paper describes a mechanism that resolves the government's time inconsistency problem. This proposal closely resembles real-world institutional arrangements and delivers credible implementation of the social optimum by giving dynamic incentives to the CB. The paper shows that delegation generates an inflation plan identical to the precommitment path when the cost of adjusting CB remuneration is negligible. When steady-state adjustment costs are nil, the government achieves perfect commitment in the steady-state. These results suggest that delegation is more robust as a commitment instrument than previously emphasized.

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For Academic Citation: Coury, Tarek and Vladimir Petkov. "Monetary Delegation: Credibility through Dynamic Incentives." Working Paper, Dubai Initiative, Belfer Center for Science and International Affairs, Harvard Kennedy School, September 1, 2010.

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