Making the central bank an agency with the mandate and reputation for maintaining price stability is a means by which a government can choose the strength of its commitment to price stability. This article develops four measures of central bank independence and explores their relation with inflation outcomes. An aggregate legal index is developedforfour decades in 72 countries. Three indicators of actual independence are developed: the rate of turnover of central bank governors, an index based on a questionnaire answered by specialists in 23 countries, and an aggregation of the legal index and the rate of turnover. Legal independence is inversely related to inflation in industrial, but not in developing, countries. In developing countries the actual frequency of change of the chief executive officer of the bank is a better proxy for central bank independence. An inflation-based index of overall central bank independence contributes significantly to explaining crosscountry variations in the rate of inflation. "Willpower is trying hard not to do something that you really want to do," said Frog. "You mean like trying not to eat all these cookies," asked Toad. "Right," said Frog. He put the cookies in a box. "There, now we will not eat any more cookies." "But we can open the box," said Toad. "That is true," said Frog. He tied some string around the box. He got a ladder and put the box up on a high shelf. "There, now we will not eat any more cookies." "But we can climb the ladder .... " (Lobel 1972) Institutions cannot absolutely prevent an undesirable outcome, nor ensure a desirable one, but the way that they allocate decisionmaking authority within the public sector makes some policy outcomes more probable and others less likely. An important example of this principle concerns the balance of authority between the central bank and the executive and legislative branches of government. Economists and practitioners in the area of monetary policy generally

This paper develops a positive theory of credibility, ambiguity, and inflation under discretion and asymmetric information. The monetary policymaker maximizes his own (politically motivated) objective function that is positively related to economic stimulation through monetary surprises and negatively related to monetary growth. The relative importance he assigns to each target shifts stochastically through time. His current preference trade-off is known to him but not to the public. When choosing the (state contingent) path of money growth for the present and the future, the policymaker compares the benefits from current stimulation with the costs associated with higher future inflation expectations. Current monetary growth conveys information to the public about future money growth because there is persistence in the policymaker's objectives. Although expectations are rational, information is imperfect because monetary control procedures are imprecise. As a result the public cannot correctly distinguish persistent changes of emphasis on different policy objectives from transitory monetary control errors. The public becomes aware of changes gradually by.observing past monetary growth. Credibility is defined in terms of the speed with which the public recognizes changes in the objectives of the policymaker. Credibility is lower the noisier monetary control and the more stable the objectives of the policymaker. Looser monetary control and a higher degree of time preference on the part of the policymaker induce him to produce higher and more variable monetary growth.When the policymaker is free to determine the accuracy of monetary control he does not always choose the most effective control available in spite of the fact that monetary surprises always have an expected value of zero. The reason is that ambiguous control procedures enable the policymaker to generate positive surprises when he cares more than on average about economic stimulation. He leaves the inevitable negative surprises for periods in which he cares more about inflation prevention. This result provides an explanation for the Fed's preference for ambiguity, recently documented by Goodfriend (1986). The policymaker is more likely to pick more ambiguous control procedures the more uncertain his objectives and the higher his time preference.The paper also provides a theoretical underpinning for the well documented crosscountry positive correlation between the level and the variability of inflation.

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The importance of seignorage relative to other sources of government revenue differs markedly across countries. The main theoretical implication of this paper is that countries with more unstable and polarized political systems rely more heavily on seignorage. This result is obtained within the context of a political model of tax reform. The model implies that the more unstable and polarized the political system, the more inefficient is the equilibrium tax structure (in the sense that tax collection is more costly to administer), and the higher therefore, the reliance on seignorage. This prediction of the model is tested on cross-section data for 79 countries. It is found that, after controlling for other variables, political instability significantly contributes to explain the fraction of government revenue derived from seignorage. This finding is very robust. We also find that seignorage is positively related to political polarization, even though here the evidence is weaker because of difficulties in measuring polarization.