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Vol. 68, No. 5
Posted 1986-05-01

Central Bank Behavior and Credibility: Some Recent Theoretical Developments

by Alex Cukierman

Alex Cukierman describes recent theories that show how the motives, constraints, and information of policymakers and the public determine monetary policy outcomes. Cukierman explains that the recent theoretical literature on central bank behavior can be divided into positive and normative categories. In this article, he focuses on the positive theories that are used to derive implications for both observable variables (e.g., the rate of money growth and the rate of inflation) and unobservable variables (e.g., policy credibility). He shows how the interactions between the policymakers and the public can produce an inflationary bias to policy actions. Moreover, Cukierman also shows how one variant of the “positive” models, the political approach, explains two other widely observed phenomena associated with monetary policy actions: a preference for ambiguity in public policy pronouncements and large swings in money growth and inflation.



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