Journal of Monetary Economics 32 (1993) 287-302. North Holland Central bank strategies, credibility, and independence A review essay Carl E. Walsh* University qf Cal(fornia. Santa Cm:, CA, USA Federal Resercr Bank zyxwvutsrqponmlkjihgfedcbaZYXWVUTSRQPONMLKJIHGFEDCB of San Francisco. Sat! Francisco. CA, USA Received August 1993 Key words: Inflation; Monetary policy; Central banking JEL c/ass(jicarion: E58; E31 1. introduction During the last thirty years, average inflation in most countries has been variable, highly persistent, and (perhaps more controversial) too high. In the U.S., for instance, inflation during the decades of the 1960s. 70s and 80s averaged 2.5%, 7.4%, and 5.1%, while the first-order serial correlation coeffi- cient for quarterly inflation in these periods was 0.7,0.9, and 0.7. Evidence from other countries during the postwar era also suggests excessive average rates of inflation characterized by high degrees of persistence. Because sustained differ- ences in inflation rates over time are only possible if there are similar differences in the rate of monetary expansion, an explanation of these stylized facts about inflation requires an explanation of central bank behavior. Why do central banks systematically engage in policies that result in positive average rates of inflation? Why does inflation exhibit such high persistence? And Corrrspondencr to: Carl E. Walsh, Department of Economics, University of California, Santa Cruz, CA 95064, USA. *I would like to thank Michael Hutchison, Bharat Trehan, and Judy Walsh for helpful comments. Any opinions expressed are not necessarily those of the Federal Reserve Bank of San Francisco or the Federal Reserve System. 0304-3932/93/$06.00 0 1993-Elsevier Science Publishers B.V. All rights reserved