We introduce a new type of incentive contract for central bankers: inflation forecast contracts, which make central … inflation. Inflation forecast contracts improve the accuracy of inflation forecasts, but have adverse consequences for output …. On balance, paying central bankers according to their forecasting performance improves welfare …

We consider a stochastic volatility model of the mean-reverting type to describe the evolution of a firm’s values … default probability. Our simulation results indicate that the stochastic volatility model tends to predict higher default … probabilities than the corresponding Merton model if a firm’s credit quality is not too low. Otherwise the stochastic volatility …