Research Papers in Economics,
Stockholm University, Department of Economics

Abstract: Waller and Walsh (1996) argue that the optimal length of the central banker can exceed one period when the central bank is conservative enough. However, the optimal conservativeness is unlikely to be exogenous. In this note we show how the optimal conservativeness and the optimal term length are determined simultaneously in the framework of Waller and Walsh. Furthermore, we extend the study to the inflation contract and the inflation target regimes. Under both regimes, the optimal parameter of the conservativeness is independet of the term length and is always 1. Moreover, it is possible of have an optimal multi-term central banker under both the state-contingent inflation contract regime and the state-contingent inflation target regime.

Keywords: central bank independence; inflation target; optimal term length

JEL-codes: E52; E58

15 pages, June 2, 1998

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