Central Bank Strategy, Credibility, and Independence: Theory and Evidence Book

	Preface
I	Motives for Monetary Expansion under Perfect Information
2	Overview of Part I	15
2.2	Why Do Governments Inflate? - Alternative Aspects of Dynamic Inconsistency	16
2.3	Why Do Central Banks Smooth Interest Rates?	22
2.4	Seigniorage, Political Instability, and the Structure of the Economy	23
2.5	Adjustable Pegs as a Partial Commitment Device and European Monetary Unification	24
3	The Employment Motive for Monetary Expansion	27
3.2	The Inflationary Bias of Monetary Policy - A Basic Model	28
3.3	Commitment as a Device to Eliminate the Inflationary Bias	32
3.4	A Multiperiod Extension	33
3.5	A Critical Look at the Economic Structure Underlying the Inflationary Bias Result	34
3.6	Alternative Foundations for the Employment-Motivated Inflationary Bias	38
3.7	The Social Welfare versus the Political Approach to Central Bank Behavior	43
4	The Revenue Motive for Monetary Expansion	47
4.2	The Cagan-Bailey Analysis and the Seemingly Irrational Behavior of High-Inflation Governments	50
4.3	A Seigniorage-Related Dynamic Inconsistency of Monetary Policy under Discretion and the Effect of Precommitments	53
4.4	Nominal Debt and Dynamic Inconsistency	56
4.5	Seigniorage, Political Instability, and the Structure of the Economy	59
4.6	Determination of the Efficiency of the Tax System and Its Effect on Seigniorage	64
4.7	Evidence on Seigniorage, Economic Structure, and Political Instability	67
5	The Mercantilistic or Balance-of-Payments Motive for Monetary Expansion	83
5.2	A Simple Game between the Central Bank and a Union in the Presence of a Balance-of-Payments Motive	84
5.3	Factors Affecting the Size of the Devaluation Bias	90
5.4	Precommitments versus Discretion	92
5.5	Applicability of the Model	93
5.6	Extensions and Qualifications	94
6	Comparison of Policy Outcomes under a System of Adjustable Pegs with Outcomes under a Commonly Managed Currency System and Its Consequences for European Monetary Unification	97
6.2	Policy Outcomes under an Adjustable Peg System	99
6.3	Policy Outcomes under a Commonly Managed Currency System	102
6.4	Comparison of the Probability of Reneging under a CMCS with This Probability under an AP System	106
6.5	Implications for the Desirability of a "Stage Two" in European Monetary Unification	107
6.6	Comparison of Mean Inflation under an AP System and a CMCS	108
7	The Financial Stability Motive, Interest Rate Smoothing, and the Theory of Optimal Seigniorage	117
7.2	The Financial Stability Motive as an Explanation for Interest Rate Smoothing	118
7.3	Central Bank Behavior and the Structure of the Financial Sector	121
7.4	The Trade-off between Financial Stability and Price Stability as an Inducement for Interest Rate Smoothing	125
7.5	The Theory of Optimal Seigniorage and Its Implications for the Behavior of Interest Rates	130
7.6	The Financial Stability Motive versus the Optimal Seigniorage Hypothesis as Positive Theories of Interest Rate Behavior	132
II	Asymmetric Information and Changing Objectives under Discretion
8	Overview of Models of Monetary Policy with Private Information	139
8.2	Private Information about the Ability to Commit	143
8.3	Private Information about the Relative Emphasis on Employment versus Price Stability with Fixed Types	144
8.4	Changing Emphasis on Alternative Objectives - A Basic Framework	145
8.5	Mandatory Announcements and the Interaction of Private Information with Central Bank Independence	149
8.6	Private Information about Money Demand and Changing Objectives	152
8.7	Private Forecasts about the State of the Economy and the Persistence of Inflation	154
8.8	Alternative Notions of Credibility and Reputation	156
8.9	Ambiguity in Monetary Policy	157
9	The Employment Motive in the Presence of a Minimal Information Advantage about Objectives	161
9.2	Shifting Objectives and the Structure of Information	165
9.3	Timing of Moves, Public's Beliefs, and the Equilibrium Concept	167
9.4	Derivation of the Policymakers' Decision Rule and Proof of the Rationality of Beliefs	170
9.5	A Benchmark - The Policymakers' Strategy under Symmetric Information	172
9.6	Comparison of the Distributions of Inflation with and without Asymmetric Information	174
9.7	A Measure of Credibility under Asymmetric Information	176
9.8	The Confusion between Persistent Changes in Objectives and Transitory Control Errors	178
9.9	The Distribution of Monetary Growth under Asymmetric Information	179
10	An Extended Information Advantage about Central Bank Objectives	185
10.2	Central Bank Objectives and Its Extended Information Advantage	186
10.3	The Equilibrium Concept	187
10.4	The Public's Beliefs and the Expected Rate of Monetary Expansion	187
10.5	Derivation of Government's Decision Rule and Proof of the Rationality of Expectations	189
10.6	Speed of Learning, Activism, Credibility, and Their Determinants	191
10.7	The Distribution of Monetary Inflation and Its Determinants with and without Asymmetric Information	195
10.8