OPTIMAL INFLATION TARGETS, CONSERVATIVE CENTRAL BANKS, AND LINEAR INFLATION CONTRACTS

Inflation-targeting regimes (like those of New Zealand, Canada, the Un ited Kingdom, and Sweden) are interpreted as having explicit inflation targets and implicit employment targets. Without employment persisten ce, an ''inflation-target-conservative'' central bank eliminates the i nflation bias, mimics an optimal inflation contract, and dominates a R ogoff ''weight-conservative'' central bank. With employment persistenc e, a state-contingent inflation bias and a stabilization bins also ari se. A constant inflation target and a constant inflation contract are still equivalent. A state-contingent inflation target combined with a weight-conservative central bank can achieve the equilibrium correspon ding to an optimal rule under commitment.