Centralised wage setting, inflation contracts, and the optimal choice of central banker

The paper examines the appropriate design of central banking institutions i n an economy in which the nominal wage is set by an inflation-averse monopo ly union as a positive mark-up over its market-clearing value. The analysis considers both the optimal choice of central banker and the potential role for a linear inflation contract. The optimal set of arrangements is a cent ral banker who attaches less significance to inflation than does society, c ombined with an inflation contract where the value of the contract paramete r is related to the union's degree of inflation-aversion.