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September/October 1995, 
Vol. 77, No. 5
Posted 1995-09-01

Performance Contracts for Central Bankers

Discretionary monetary policy actions aimed at expanding a nation’s economy may simply produce an excessive rate of inflation without a corresponding increase in output or employment levels. Various proposals have been advanced to eliminate this inflationary bias, such as building a reputation for price stability and making the central bank independent of political pressure. Christopher J. Waller examines a new proposal: performance contracts, which would provide the proper financial incentives for the central banker to pursue price stability. But what is a performance contract and how does it work? More important, how difficult would it be to actually use one?