Central Bank Independence and the Sacrifice Ratio: The Dark Side of the Force
The paper looks at the empirical relationship between central bank independence (CBI) and income losses caused by restrictive monetary policy. It finds that higher CBI goes along with higher sacrifice ratios. This relationship is strongly nonlinear (differences at high CBI levels matter much more), robust and dominant (no other variables discussed in the literature exert a significant influence alongside CBI). Also between 1973 and 1988 total income losses added up over all disinflation episodes are highest in countries with the most independent central banks. No evidence is found that higher sacrifice ratios are due to flatter Philips curves.
Volume (Year): 133 (1997)
Issue (Month): III (September)
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