Optimal Inflation Targets, "Conservative" Central Banks, and Linear Inflation Contracts

Inflation-targeting regimes (like those of New Zealand, Canada, the United Kingdom, and Sweden) are interpreted as having explicit inflation targets and implicit employment targets. Without employment persistence, an "inflation-target-conservative" central bank eliminates the inflation bias, mimics an optimal inflation contract, and dominates a Rogoff "weight-conservative" central bank. With employment persistence, a state-contingent inflation bias and a stabilization bias also arise. A constant inflation target and a constant inflation contract are still equivalent. A state-contingent inflation target combined with a weight-conservative central bank can achieve the equilibrium corresponding to an optimal rule under commitment.