State-Contingent Inflation Contracts and Output Persistence*

Paper number: 95/13

Paper date: September, 1995

Year: 1995

Paper Category: Discussion Paper


Ben Lockwood

University of Exeter and CEPR**


This note shows that the government can achieve its precommitment outcome in monetary policy when output follows an autoregressive process, by offering the central banker a linear contract, and where the parameters of the contract depend on lagged output. This note therefore offers an extension of recent results of Walsh to the case of persistence in real economic variables such as output or unemployment.

*The material in this note is taken from an earlier paper, Lockwood, Miller and Zhang (1994). This earlier paper also considered delegation of monetary policy where output is persistent, but where no contracts could be offered to the CB.
**Mailing address: Department of Economics, University of Exeter, Exeter, EX4 4RJ, England.