Central Bank Independence in Transition Economies

W. Maliszewski 

CASE Foundation 

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when shocks are large enough. Lohmann (1992) shows that this institutional setting 

dominates zero-inflation rule, full discretion and the Rogoff (1985) solution. 

1.4.3. Credibility vs. Flexibility Trade Off and Political Monetary Cycles 

Although so much theoretical work has been done to alleviate the credibility vs. 

flexibility trade off, empirical works on CBI does not support the Rogoff's hypothesis 

that the more independent Central Bank causes higher output variability. Alesina and 

Gatti (1995) show that in the political monetary cycles model more independent 

Central Bank may provide even lower variance of output than the social planner. The 

point is that the conservative Banker does not care enough about the stabilisation of 

the supply shocks but, instead, protects the economy from the politically induced 

cycles as in Alesina and Sachs (1988) model. In result the overall output variability 

may be lower.