Delegating Optimal Monetary Policy Inertia: Inflation, Output Gap Growth or Nominal Income Growth Targeting?*

Abstract. This paper shows that optimal delegation to an independent cen-tral bank with a different loss function than the societal one alleviates the sta-bilization bias and exactly replicates the timeless-optimal commitment equi-librium under discretion in a forward-looking model. We propose a general linear-quadratic method to solve for the optimal delegation parameters that generate the optimal amount of inertia in a Markov perfect equilibrium. The general framework nests a variety of delegation schemes that can be designed optimally: state-contingent inflation and output gap contracts, and inflation, output gap growth or nominal income growth targeting. Notably, all delega-tion schemes are time consistent