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

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  • Tabellini, Guido

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.

Suggested Citation

  • Tabellini, Guido, 1987. "Central Bank Reputation and the Monetization of Deficits: The 1981 Italian Monetary Reform," Economic Inquiry, Western Economic Association International, vol. 25(2), pages 185-200, April.
  • Handle: RePEc:oup:ecinqu:v:25:y:1987:i:2:p:185-200
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    Cited by:

    1. Eugenio Gaiotti & Alessandro Secchi, 2012. "Monetary policy and fiscal dominance in Italy from the early 1970s to the adoption of the euro: a review," Questioni di Economia e Finanza (Occasional Papers) 141, Bank of Italy, Economic Research and International Relations Area.
    2. Oliver Pamp, 2008. "Partisan Preferences and Political Institutions: Explaining Fiscal Retrenchment in the European Union," European Political Economy Review, European Political Economy Infrastructure Consortium, vol. 8(Spring), pages 4-39.
    3. Padovano, Fabio & Venturi, Larissa, 2001. "Wars of Attrition in Italian Government Coalitions and Fiscal Performance: 1948-1994," Public Choice, Springer, vol. 109(1-2), pages 15-54, October.

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