Optimal contracts for central bankers: a note

Walsh (1995) was the first author to find a full solution to the problem of time inconsistency in monetary policy, namely, a contract that eliminates the inflation bias without incurring any output stabilization costs. We provide an alternative method for obtaining such an optimal contract. Its components are shown explicitly to be derived from a constrained optimization problem which is solved by applying the Kuhn-Tucker conditions to a muti-stage game. We also conclude that there are more socially optimal contracts apart from the one considered by Walsh (1995).