Central Bank Independence in Transition Economies

W. Maliszewski 

CASE Foundation 

12

society can be better off by appointing a central banker with established anti-

inflationary reputation and for a long term of office. Backus and Driffill (1985) 

conclude that “autonomous central banks (may) act as a precommitment device which 

may help to make noninflationary policies more credible and less costly.”  

The Backus and Driffill analysis is extended by Cukierman and Meltzer (1986). 

In their framework policy objectives change gradually and monetary control is 

incomplete. Private agents do not know the current value of the weight in the objective 

function but draw inferences about it by observing monetary expansion in the previous 

periods. The optimal money growth in the model is higher the less effective is its 

control and the more biased are policymakers towards economic stimulation. The 

solution exhibits the familiar inflationary bias which increases with the average value 

of the weight in objective function. An important difference is that, because of 

asymmetric information, the discretionary solution may be superior to the binding zero 

rate of money growth rule. Another important finding is that it may be profitable for 

policymakers to increase the variance of the money growth control error. By choosing 

“the optimal degree of ambiguity” policymakers may affect the speed of learning 

about their shifting objectives and the average value of benefits from inflationary 

surprises. The model features an important trade-off between flexibility and credibility 

(Goodhart 1994). The more ambiguous is the monetary policy, the greater is a scope 

for surprise monetary actions but the less their credibility and greater mean inflation.