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The Time Inconsistency of Delegation-Based Time Inconsistency Solutions in Monetary Policy

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  • Florin Bilbiie

    (CES - Centre d'économie de la Sorbonne - UP1 - Université Paris 1 Panthéon-Sorbonne - CNRS - Centre National de la Recherche Scientifique, PSE - Paris School of Economics - UP1 - Université Paris 1 Panthéon-Sorbonne - ENS-PSL - École normale supérieure - Paris - PSL - Université Paris Sciences et Lettres - EHESS - École des hautes études en sciences sociales - ENPC - École des Ponts ParisTech - CNRS - Centre National de la Recherche Scientifique - INRAE - Institut National de Recherche pour l’Agriculture, l’Alimentation et l’Environnement)

Abstract

A prominent solution to the time-inconsistency problem inherent to monetary policymaking consists of delegating monetary policy to an independent central bank by an appropriately designed inflation contract or target. This paper shows that delegation is not a solution to this problem: optimal delegation requires commitment and is not time-consistent, while time-consistent delegation is suboptimal. We prove these results formally in a popular dynamic model of monetary policy. Introducing costs of reappointing the central banker can only solve this problem if the government is infinitely averse to changing central bank's contract.

Suggested Citation

  • Florin Bilbiie, 2011. "The Time Inconsistency of Delegation-Based Time Inconsistency Solutions in Monetary Policy," PSE-Ecole d'économie de Paris (Postprint) hal-00622870, HAL.
    • Handle: RePEc:hal:pseptp:hal-00622870
    DOI: 10.1007/s10957-011-9847-x
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    References listed on IDEAS

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    Cited by:

    1. Bilbiie, Florin O., 2014. "Delegating optimal monetary policy inertia," Journal of Economic Dynamics and Control, Elsevier, vol. 48(C), pages 63-78.

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