Does a Higher Sacrifice Ratio Mean that Central Bank Independence is Excessive?
AbstractRecent empirical studies show that sacrifice ratios calculated during periods of inflation stabilization are usually higher in countries with higher levels of central bank independence (CBI). This led some economists to conclude that CBI does not produce a credibility bonus implying, at least implicitly, that CBI may be undesirable. Using a simple model in which higher CBI is positively associated with the probability that preannounced inflation targets will be delivered, this paper shows that welfare is higher when CBI is higher, refuting this view. This result holds independently of the sign of the association between sacrifice ratios and CBI. The paper also points out that both Lucas¡¯, as well as Neo - Keynesian theories of the Phillips curve imply that countries with more independent central banks should have higher sacrifice ratios. Potential biases in empirical measures of sacrifice ratios are discussed as well.
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Bibliographic InfoArticle provided by Society for AEF in its journal Annals of Economics and Finance.
Volume (Year): 3 (2002)
Issue (Month): 1 (May)
Disinflation; Sacrifice ratios; Central bank independence; Credibility; Phillips curves;
Find related papers by JEL classification:
- E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
- E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
- E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies
- E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
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