Central bank independence and the sacrifice ratio: The dark side of the force

Manfred Gärtner

30 citations0/0 files storedRePEc: Research Papers in Economics

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Monetary Policy and Economic Impact Global Financial Crisis and Policies Fiscal Policies and Political Economy

Abstract

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.

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References

1973Some International Evidence on Output-Inflation Tradeoffs.1993Central Bank Independence and Macroeconomic Performance: Some Comparative Evidence 1992Central Bank Strategy, Credibility, and Independence: Theory and Evidence 1993Openness and Inflation: Theory and Evidence 1979Differential Inflationary Expectations and the Variability of the Rate of Inflation: Theory and Evidence 1995Disinflation with imperfect credibility 1996Central bank independence and sacrifice ratios 1984Contracts, Credibility, and Disinflation

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2012Monetary policy and wage bargaining in the EMU: restrictive ECB policies, high unemployment, nominal wage restraint and inflation above the target 2001Central Bank Independence and the Design of Fiscal Institutions 2002Does a Higher Sacrifice Ratio Mean that Central Bank Independence is Excessive 2000Central Bank Independence and Sacrifice Ratios: Some Further Considerations 2010Central Bank independence and inflation: Evidence from emerging countries

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