Central Bank Reputation and the Monetization of Deficits: The 1981 Italian Monetary Reform

Guido Tabellini

Economic Inquiry, 1987, vol. 25, issue 2, 185-200

Abstract: In 1981 the Bank of Italy was freed from the obligation to purchase the unsold public debt at the Treasury auctions. Si nce then, the Bank of Italy has reduced debt monetization. This paper seeks to explain this policy shift by analyzing a game between the m onetary and fiscal authorities. The fiscal authority is imperfectly i nformed about the central bank preferences. An equilibrium exists in which the central bank does not monetize, so as to establish a reputa tion of being independent. Monetization raises fiscal deficits and ma y raise public debt relative to a nonaccommodative policy. Copyright 1987 by Oxford University Press.

Date: 1987
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