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Article
Inflation Forecast Contracts
Journal of Economic Dynamics and Control (2014)
  • Hans Gersbach, ETH Zurich
  • Volker Hahn, University of Konstanz
Abstract
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 contracts improve the accuracy of inflation forecasts, but have adverse consequences for output. On balance, paying central bankers according to their forecasting performance improves welfare. Optimal inflation forecast contracts stipulate high rewards for accurate forecasts.
Keywords
  • central banks,
  • incentive contracts,
  • transparency,
  • forward guidance,
  • inflation targeting,
  • inflation forecast targeting,
  • intermediate targets
Disciplines
Publication Date
2014
Publisher Statement
The link is to an old working paper version.
Citation Information
Hans Gersbach and Volker Hahn. "Inflation Forecast Contracts" Journal of Economic Dynamics and Control (2014)
Available at: http://works.bepress.com/volker_hahn/13/