The Effect of Transparency, Independence and Accountability of Central Banks on Disinflation Costs

Golnaz Motie and Joshua Hall
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Golnaz Motie: Western Kentucky University

No 20-02, Working Papers from Department of Economics, West Virginia University

Abstract: Policymakers often want to achieve low inflation to avoid the low economic growth associated with high inflation. Reducing inflation through monetary policy (disinflation) is not costless as it can coincide with higher unemployment rates and reduced output. In this paper we use sacrifice ratios to calculate the cost of disinflation during the 1990s for 40 countries. We then study whether transparency and democratic accountability of monetary institutions reduces disinflation costs. Our empirical results suggest that more transparent central banks seem to face higher disinflation costs. This result could be because more transparent central banks have lower initial inflation rates during their disinflation episodes. Therefore, reducing inflation even further is more costly to them. We find no significant relationship between independence of central banks and the disinflation costs they faced during 1990s.

JEL-codes: E58 H11 (search for similar items in EconPapers)
Pages: 12 pages
Date: 2020
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