This research focuses on two issues related to the contracting approach to monetary policy design. First, the project addresses a range of questions dealing with the implementation of incentives, the relationship of alternative policy mechanisms such as central bank independence and inflation targeting to the type of incentive structures suggested by optimal central bank contracts, and the effects of information on the feasibility of achieving optimal policy outcomes. Second, the project advances our understanding of the means through which central bank independence leads to differences in macroeconomic outcomes by examining the role of delegation, the factors that determine the optimal degree of delegation, and the consequences for monetary and fiscal interactions of alternative aspects of the delegation of monetary policy authority. The project address these issues both through theoretical modelling and applied regression analysis. The results of this project will clarify how mechanisms such as inflation targeting combined with central bank announcements might be used to implement the types of optimal incentive structures emphasized in the contracting approach to the design of monetary policy. The project will also identify the issues that are important for determining the degree of delegation that is optimal in the conduct of monetary policy and how the presence of institutions that are insulated from direct electoral influences may actually promote democratic stability. These results will contribute to the ongoing debate on the consequences of alternative institutional structures for central banks and the role of inflation targeting as a framework for the conduct of monetary policy.
