Monetary policy uncertainty and interest rate targeting

This paper studies the issue of monetary delegation in the case where central banker’s preferences are uncertain. A distinctive feature of the analysis is that it introduces nominal interest rate targets to the monetary delegation scheme in addition to linear contracts, quadratic punishments, and inflation targets. This paper shows that the implementation of interest rate targeting will improve social welfare since it leads the central bank to make smaller interventions, which limits the scope for the central bank’s uncertain preferences to impact the economy.