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Does a Higher Sacrifice Ratio Mean that Central Bank Independence is Excessive?

Author

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  • Alex Cukierman

    () (Tel-Aviv University and Center, Tilburg University)

Abstract

Recent 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.

Suggested Citation

  • Alex Cukierman, 2002. "Does a Higher Sacrifice Ratio Mean that Central Bank Independence is Excessive?," Annals of Economics and Finance, Society for AEF, vol. 3(1), pages 1-25, May.
  • Handle: RePEc:cuf:journl:y:2002:v:3:i:1:p:1-25
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    References listed on IDEAS

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    2. Lucas, Robert E, Jr, 1973. "Some International Evidence on Output-Inflation Tradeoffs," American Economic Review, American Economic Association, pages 326-334.
    3. Svensson, Lars E O, 1997. "Optimal Inflation Targets, "Conservative" Central Banks, and Linear Inflation Contracts," American Economic Review, American Economic Association, pages 98-114.
    4. Barro, Robert J & Gordon, David B, 1983. "A Positive Theory of Monetary Policy in a Natural Rate Model," Journal of Political Economy, University of Chicago Press, vol. 91(4), pages 589-610, August.
    5. Bomfim, Antulio N & Rudebusch, Glenn D, 2000. "Opportunistic and Deliberate Disinflation under Imperfect Credibility," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 32(4), pages 707-721, November.
    6. Posen, Adam, 1998. "Central Bank Independence and Disinflationary Credibility: A Missing Link?," Oxford Economic Papers, Oxford University Press, vol. 50(3), pages 335-359, July.
    7. Guzzo, Vincenzo & Velasco, Andres, 1999. "The case for a populist Central Banker," European Economic Review, Elsevier, vol. 43(7), pages 1317-1344, June.
    8. Cukierman, Alex & Lippi, Francesco, 1999. "Central bank independence, centralization of wage bargaining, inflation and unemployment:: Theory and some evidence," European Economic Review, Elsevier, vol. 43(7), pages 1395-1434, June.
    9. Alex Cukierman, 1992. "Central Bank Strategy, Credibility, and Independence: Theory and Evidence," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262031981, January.
    10. Daniel L. Thornton, 1996. "The costs and benefits of price stability: an assessment of Howitt's rule," Review, Federal Reserve Bank of St. Louis, issue Mar, pages 23-38.
    11. Capie,Forrest & Fischer,Stanley & Goodhart,Charles & Schnadt,Norbert, 1995. "The Future of Central Banking," Cambridge Books, Cambridge University Press, number 9780521496346, December.
    12. Guy Debelle & Stanley Fischer, 1994. "How independent should a central bank be?," Conference Series ; [Proceedings], Federal Reserve Bank of Boston, pages 195-225.
    13. Andreas Fischer, 1996. "Central bank independence and sacrifice ratios," Open Economies Review, Springer, pages 5-18.
    14. Kydland, Finn E & Prescott, Edward C, 1977. "Rules Rather Than Discretion: The Inconsistency of Optimal Plans," Journal of Political Economy, University of Chicago Press, vol. 85(3), pages 473-491, June.
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    Cited by:

    1. Mazumder, Sandeep, 2014. "Determinants of the sacrifice ratio: Evidence from OECD and non-OECD countries," Economic Modelling, Elsevier, vol. 40(C), pages 117-135.
    2. Down Ian, 2009. "Central Bank Independence, Disinflations and Monetary Policy," Business and Politics, De Gruyter, vol. 10(3), pages 1-22, January.
    3. Amarasekara, Chandranath, 2008. "Have the Sacrifice Ratios Changed under Inflation Targeting? An Empirical Investigation," MPRA Paper 64867, University Library of Munich, Germany.

    More about this item

    Keywords

    Disinflation; Sacrifice ratios; Central bank independence; Credibility; Phillips curves;

    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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