This paper addresses the issue of credibility from an econometric perspective. It develops a rational expectations model of inflation in which the dynamics are driven by the level of government spending and by the effect of past inflation rates on the value of real taxes. Government expenditure is modeled as an exogenous autoregressive process subject to discrete changes in regime. The regimes are defined by whether the level of spending is or is not consistent with the rate of inflation targeted by the government as part of a stabilization program. In making their money demand decision, the agents need to construct probability inferences regarding the state of the expenditure process. Credibility is quantified by the agents' inferred probability that the joint observation of inflation, the nominal interest rate, and government spending is generated by the reformed expenditure regime. In an application to Israel, results indicate that the failed stabilization program of November 1984 was less than fully credible to the agents. The uncertainty about the true nature of the expenditure process partially explains the volatility of the rate of inflation in this period. In contrast, for the July 1985 program the agents correctly inferred a change in the regime driving the government spending process.

This paper addresses the issue of credibility from an econometric perspective. It develops a rational expectations model of inflation in which the dynamics are driven by the level of government spending and by the effect of past inflation rates on the value of real taxes. Government expenditure is modeled as an exogenous autoregressive process subject to discrete changes in regime. The regimes are defined by whether the level of spending is or is not consistent with the rate of inflation targeted by the government as part of a stabilization program. In making their money demand decision, the agents need to construct probability inferences regarding the state of the expenditure process. Credibility is quantified by the agents' inferred probability that the joint observation of inflation, the nominal interest rate, and government spending is generated by the reformed expenditure regime. In an application to Israel, results indicate that the failed stabilization program of November 1984 was less than fully credible to the agents. The uncertainty about the true nature of the expenditure process partially explains the volatility of the rate of inflation in this period. In contrast, for the July 1985 program the agents correctly inferred a change in the regime driving the government spending process.

This paper studies the theoretical and empirical implications of monetary policy making by committee under four different voting protocols. The protocols are a consensus model, where a supermajority is required for a policy change; an agenda-setting model, where the chairman controls the agenda; a dictator model, where the chairman has absolute power over the committee; and a simple majority model, where policy is determined by the median member. These protocols give preeminence to different aspects of the actual decision-making process and capture the observed heterogeneity in formal procedures across central banks. The models are estimated by maximum likelihood using interest rate decisions by the committees of five central banks, namely the Bank of Canada, the Bank of England, the European Central Bank, the Swedish Riksbank, and the U.S. Federal Reserve. For all central banks, results indicate that the consensus model fits actual policy decisions better than the alternative models. This suggests that despite institutional differences, committees share unwritten rules and informal procedures that deliver observationally equivalent policy decisions.