Does a Higher Sacrifice Ratio Mean that Central Bank
Independence is Excessive?

Alex Cukierman

Recent empirical studies show that sacrifice ratios calculated during periods of inflation stabilization are usually higher in countries with higher levels of central bank independence (CBI). This led some economists to conclude that CBI does not produce a credibility bonus implying, at least implicitly, that CBI may be undesirable. Using a simple model in which higher CBI is positively associated with the probability that preannounced inflation targets will be delivered, this paper shows that welfare is higher when CBI is higher, refuting this view. This result holds independently of the sign of the association between sacrifice ratios and CBI. The paper also points out that both Lucas’, as well as Neo - Keynesian theories of the Phillips curve imply that countries with more independent central banks should have higher sacrifice ratios. Potential biases in empirical measures of sacrifice ratios are discussed as well.