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Inflation, Delegation and Reputation

The purpose of this project is to unite two areas of central bank design. Both of these areas consider the time inconsistency problem faced by central banks. That is, a monetary authority who make monetary policy in order to maximize national welfare will "overinflate" despite the fact that such overinflation is suboptimal. The first strand of literature considered a model of central bank reputation. This literature showed that when there is asymmetric information about the central bank's will to "fight inflation," then a weak central bank will be concerned about this reputation and as a result, will be willing to control inflation to some extent in order to enhance its reputation. A second strand of literature was to suppose that the government could appoint a "conservative" central banker to optimally control inflation. We argue that both of these strands of literature are important and as a result, they need to be studied within a single framework.