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Central Bank Independence, Speed of Disinflation and the Sacrifice Ratio

  • Giuseppe Diana


  • Moïse Sidiropoulos

Using a theoretical model in which the degree of central bank independence affects the degree of inflation persistence and therefore the speed of disinflation, this paper suggests that sacrifice ratios are lower when central bank independence is higher. Empirical tests, using estimates of sacrifice ratios based on disinflation episodes for 18 OECD countries during the 1960--90 period, show that this result also holds empirically. This finding seems to be consistent with the credibility hypothesis by pointing out that an independent central bank may produce a credibility bonus.

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Article provided by Springer in its journal Open Economies Review.

Volume (Year): 15 (2004)
Issue (Month): 4 (October)
Pages: 385-402

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Handle: RePEc:kap:openec:v:15:y:2004:i:4:p:385-402
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  1. Lucas, Robert E, Jr, 1973. "Some International Evidence on Output-Inflation Tradeoffs," American Economic Review, American Economic Association, vol. 63(3), pages 326-34, June.
  2. Kenneth Rogoff, 1985. "The Optimal Degree of Commitment to an Intermediate Monetary Target," The Quarterly Journal of Economics, Oxford University Press, vol. 100(4), pages 1169-1189.
  3. Cecchetti, Stephen G & Rich, Robert W, 2001. "Structural Estimates of the U.S. Sacrifice Ratio," Journal of Business & Economic Statistics, American Statistical Association, vol. 19(4), pages 416-27, October.
  4. Ernst Baltensperger & Peter Kugler, 2000. "Central Bank Independence and Sacrifice Ratios: Some Further Considerations," Open Economies Review, Springer, vol. 11(2), pages 111-125, April.
  5. Barro, Robert J. & Gordon, David B., 1983. "Rules, discretion and reputation in a model of monetary policy," Journal of Monetary Economics, Elsevier, vol. 12(1), pages 101-121.
  6. Guy Debelle & Stanley Fischer, 1994. "How independent should a central bank be?," Conference Series ; [Proceedings], Federal Reserve Bank of Boston, vol. 38, pages 195-225.
  7. Manfred Gärtner, 1997. "Central Bank Independence and the Sacrifice Ratio: The Dark Side of the Force," Swiss Journal of Economics and Statistics (SJES), Swiss Society of Economics and Statistics (SSES), vol. 133(III), pages 513-538, September.
  8. Andreas Fischer, 1996. "Central bank independence and sacrifice ratios," Open Economies Review, Springer, vol. 7(1), pages 5-18, January.
  9. Dornbusch, Rudiger & Fischer, Stanley, 1993. "Moderate Inflation," World Bank Economic Review, World Bank Group, vol. 7(1), pages 1-44, January.
  10. Hutchison, M M & Walsh, C E, 1998. "The Output-Inflation Tradeoff and Central Bank Reform: Evidence from New Zealand," Economic Journal, Royal Economic Society, vol. 108(448), pages 703-25, May.
  11. Jordan, Thomas J., 1999. "Central bank independence and the sacrifice ratio," European Journal of Political Economy, Elsevier, vol. 15(2), pages 229-255, June.
  12. Laurence Ball, 1994. "What Determines the Sacrifice Ratio?," NBER Chapters, in: Monetary Policy, pages 155-193 National Bureau of Economic Research, Inc.
  13. Eijffinger, S-C-W & de Haan, J, 1996. "The Political Economy of Central-Bank Independence," Princeton Studies in International Economics 19, International Economics Section, Departement of Economics Princeton University,.
  14. Laurence Ball & N. Gregory Mankiw & David Romer, 1988. "The New Keynsesian Economics and the Output-Inflation Trade-off," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 19(1), pages 1-82.
  15. Michael Bleaney, 2001. "Exchange Rate Regimes and Inflation Persistence," IMF Staff Papers, Palgrave Macmillan, vol. 47(3), pages 5.
  16. Alesina, Alberto & Summers, Lawrence H, 1993. "Central Bank Independence and Macroeconomic Performance: Some Comparative Evidence," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 25(2), pages 151-62, May.
  17. Grubb, David B. & Jackman, Richard & Layard, Richard, 1983. "Wage rigidity and unemployment in OECD countries," European Economic Review, Elsevier, vol. 21(1-2), pages 11-39.
  18. Fischer, Stanley, 1983. "Indexing and inflation," Journal of Monetary Economics, Elsevier, vol. 12(4), pages 519-541, November.
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