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Openness, Central Bank Independence, and the Sacrifice Ratio

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  • Daniels, Joseph P
  • Nourzad, Farrokh
  • Vanhoose, David D

Abstract

Traditional explanations of the negative correlation between openness and inflation presume that an inverse relationship between the degree of openness and the sacrifice ratio reduces the inflation bias of discretionary monetary policy. Temple (2002) concludes, however, that such a relationship fails to emerge in cross-country data. Our analysis of the same cross-country data considered by Temple indicates that once the degree of central bank independence and its interaction with greater openness is considered, there is an unambiguous positive relationship between openness and the sacrifice ratio. In addition, increased openness lessens the positive effect of central bank independence on the sacrifice ratio.

Suggested Citation

  • Daniels, Joseph P & Nourzad, Farrokh & Vanhoose, David D, 2005. "Openness, Central Bank Independence, and the Sacrifice Ratio," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 37(2), pages 371-379, April.
  • Handle: RePEc:mcb:jmoncb:v:37:y:2005:i:2:p:371-79
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    References listed on IDEAS

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