We introduce a new type of incentive contract for central bankers: inflation forecast contracts, which make central bankers’ remunerations contingent on the precision of their inflation forecasts. We show that such contracts enable central bankers to influence inflation expectations more...

The new Keynesian literature typically makes the assumption that firms always have to satisfy demand. Because this assumption is at odds with profit-maximizing behavior under Calvo pricing when long-run inflation is positive, we present a new Keynesian model that relaxes this assumption. Our...

This paper extends the concept of discretionary equilibrium for linear-quadratic models with rational expectations by allowing for linear non-Markovian strategies of the policy-maker and the other agents in the economy. Applying this concept to the standard New Keynesian framework, we show that...