Accountability, Transparency, and Inflation Targeting

Inflation targeting regimes define a performance measure for the central bank. A regime that places a large (small) weight on achieving the target is analogous to a high- (low-) powered incentive scheme. High-powered incentive structures promote accountability but may distort stabilization policy. The optimal power under inflation targeting is derived under perfect and imperfect information. The fundamental trade-off between accountability and stabilization depends on the degree of transparency, defined as the ability to monitor the central bank's performance. Multiplicative uncertainty increases the optimal weight to place on achieving an inflation target.