Essays on the political economy of central bank policy

Sammanfattning: This thesis consists of four independent essays, summarized below.In "Optimal Inflation Targets, Inflation Contracts and Political Cycles", we show that inflation contracts and inflation targets can eliminate both the inflation bias and politically induced variance, if electoral uncertainty merely is due to different preferences. The contract and the target can be delegated by the winning party after the election. Concern for reputation can lead to the convergence of the inflation targets assigned by different parties. When the uncertainty is caused not only by different preferences, but also by different desired rates of inflation, it is quite possible to reduce inflation but increase the variance of inflation and the variance of output by adopting an inflation target regime.In "Central-Bank Independence, Economic Behavior, and Optimal Term Lengths: Comment", we show how optimal conservativeness and optimal term length are determined simultaneously in the framework of Waller and Walsh. We also show that, under the constant inflation contract and the constant inflation target regimes, the optimal parameter of conservativeness is independent of the term length and is always one period. Moreover, it is possible to have an optimal multi-term central banker under both the state-contingent inflation contract regime and the state-contingent inflation target regime.In "The Role of an Instrument Independent Central Bank in a Multisector Economy", we study how the heterogeneity of market structure and structural change affect monetary policy decisions. The heterogeneity can lead to disagreement on the inflation contract and the inflation target, resulting in various degrees of credibility for the inflation target in a one-shot game. The classical sector would prefer to assign a more credible inflation target, associated with a higher output variability, than the nonclassical sector.In "Policy Convergence in a Multisector Economy", we analyze how the heterogeneity of market structure affects the monetary policy decision when the game is infinitely repeated. There is always a sustainable cooperation between the two sectors for any discount rate, when both sectors benefit equally from the cooperation. When the discount rate approaches 1, a full policy convergence equilibrium results, where cooperation is sustainable. Moreover, the larger the probability of the classical sector being incumbent, the more credible the inflation target, and the smaller the inflation variance, but the higher the output variance.