CENTRAL BANK REPUTATION AND THE MONETIZATION OF DEFICITS: THE 1981 ITALIAN MONETARY REFORM

Guido Tabellini

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Monetary Policy and Economic Impact Fiscal Policies and Political Economy European Monetary and Fiscal Policies

Abstract

In 1981 the Bank of Italy was freed from the obligation to purchase the unsold public debt at the Treasury auctions. Since then, the Bank of Italy has reduced debt monetization. The paper seeks to explain this policy shift by analyzing a game between the monetary and fiscal authorities. The fiscal authority is imperfectly informed about the central bank preferences. An equilibrium exists in which the central bank does not monetize, so as to establish a reputation of being independent. Monetization raises fiscal deficits and may raise public debt relative to a non‐accommodative policy.

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References

1982Dynamic Noncooperative Game Theory 1982Reputation and imperfect information 1985Debt, Deficits, and Finite Horizons 1983Optimal fiscal and monetary policy in an economy without capital 1987RULES AND DISCRETION WITH NONCOORDINATED MONETARY AND FISCAL POLICIES 1986Reputation in a model of monetary policy with incomplete information 1987Game-Theoretic Models of Bargaining.1986Sequential Bargaining Under Asymmetric Information

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