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Central Bank Independence, Speed of Disinflation and the Sacrifice Ratio

  • Giuseppe Diana
  • Moise Sidiropoulos

This paper examines the impact of central bank independence on inflation persistence. Our theoretical analysis predicts that a higher degree of central bank independence leads to a lower inflation persistence and therefore to a higher speed of disinflation. The empirical results, provided using a 18 OECD countries sample, show that central bank independence is negatively related to the degree of inflation persistence. In addition, as there is a positive correlation between inflation persistence and the sacrifice ratio, we conclude that central bank independence, through its influence on inflation persistence, is negatively correlated to the sacrifice ratio.

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Paper provided by Bureau d'Economie Théorique et Appliquée, UDS, Strasbourg in its series Working Papers of BETA with number 2003-08.

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Date of creation: 2003
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Handle: RePEc:ulp:sbbeta:2003-08
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  1. 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.
  2. 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.
  3. Stephen G. Cecchetti & Robert W. Rich, 1999. "Structural estimates of the U.S. sacrifice ratio," Staff Reports 71, Federal Reserve Bank of New York.
  4. 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.
  5. Laurence Ball, 1993. "What Determines the Sacrifice Ratio?," NBER Working Papers 4306, National Bureau of Economic Research, Inc.
  6. 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.
  7. Jordan, Thomas J., 1999. "Central bank independence and the sacrifice ratio," European Journal of Political Economy, Elsevier, vol. 15(2), pages 229-255, June.
  8. Fischer, Stanley, 1983. "Indexing and inflation," Journal of Monetary Economics, Elsevier, vol. 12(4), pages 519-541, November.
  9. Dornbusch, Rudiger & Fischer, Stanley, 1991. "Moderate inflation," Policy Research Working Paper Series 807, The World Bank.
  10. Michael Bleaney, 2001. "Exchange Rate Regimes and Inflation Persistence," IMF Staff Papers, Palgrave Macmillan, vol. 47(3), pages 5.
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  12. 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.
  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. Guy Debelle & Stanley Fischer, 1994. "How independent should a central bank be?," Working Papers in Applied Economic Theory 94-05, Federal Reserve Bank of San Francisco.
  15. Andreas Fischer, 1996. "Central bank independence and sacrifice ratios," Open Economies Review, Springer, vol. 7(1), pages 5-18, January.
  16. 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.
  17. Rogoff, Kenneth, 1985. "The Optimal Degree of Commitment to an Intermediate Monetary Target," The Quarterly Journal of Economics, MIT Press, vol. 100(4), pages 1169-89, November.
  18. 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.
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