Central Bank Independence and the Cost of Disinflation: Why the Wage Contracts Length Matters?

Giuseppe Diana () and Moise Sidiropoulos

International Advances in Economic Research, 2006, vol. 12, issue 3, 287-297

Abstract: Recent empirical contributions demonstrate that countries with less independent central banks enjoy lower output losses during disinflationary cycles. To explain these somewhat surprising empirical findings, some authors suggest that independent central banks probably face a flatter short-run Phillips curve. In this paper, we provide both theoretical and empirical arguments to rationalize this intuition. We demonstrate that, since central bank independence reduces the mean inflation rate and its variance, wage setters opt for a lower degree of nominal wage indexation leading to more wage and price inertia and, thus, to a flatter short-run Phillips curve. Consequently, this paper put forward a channel of positive influence of central bank independence on the sacrifice ratio through its impact on nominal wage indexation. Empirical tests, performed using a sample of 19 OECD countries during the 1960–1990 period, show that these theoretical results hold also empirically. Copyright IAES 2006

Keywords: E52; E58 (search for similar items in EconPapers)
Date: 2006
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Citations: View citations in EconPapers (4)

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DOI: 10.1007/s11294-006-9017-3

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