“How do different institutional arrangements for the central bank perform when central bankers have private objectives and society’s objectives vary with time? This paper evaluates three benchmark monetary institutions from a constitutional perspective: (i) a contract with an inflation- or monetary target announcement; (ii) an inflation rule, (iii) the laissez faire policy, i.e., the absence of any contractual arrangement. At the stage of institutional choice there is uncertainty about both society’s mean inflation target and the central banker’s future inflation target. A target announcement reveals the type of the central banker and solves the credibility vs. flexibility trade-off but it can not prevent that the central banker follows private objectives. The announcement-based contract is the optimal institution if (i) the initial uncertainty about the central banker’s objectives is small and (ii) if unemployment is sufficiently high.” Read more.

“A Comparison of Three Institutions for Monetary Policy When Central Bankers Have Private Objectives”
Hans Peter Gruner
Public Choice, Vol. 92, No. 1/2 (Jul., 1997), pp. 127-143.

***Note: I do not agree with the author’s definition of laissez faire used for this paper. Nor do I necessarily support these institutional arrangements. It was an interesting paper that I thought I would share.

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