Recent Central-Bank Reforms and the Role of Price Stability as the Sole Objective of Monetary Policy

Recent and prospective central banking reforms represent attempts to develop institutional solutions for the inflation bias that can arise under discretionary monetary policy. An alternative to mandated objectives or targeting requirements is offered by proposals to develop incentive contracts that base the central bank's rewards (or penalties) solely on the realized rate of inflation. Deriving optimal incentive schemes provides a normative benchmark against which central bank institutions can be compared. New Zealand's policy structure most resembles a performance contract; it has well-defined procedures for setting short-run targets and a system to ensure accountability. As yet, however, this system has not really been tested. In Europe, the emphasis has been on political independence. Less attention has been given to ensuring that the correct incentives for making short-run policy tradeoffs are established, nor has sufficient attention been placed on ensuring accountability.