Comment on Alex Cukierman: Commitment through Delegation, Political Influence and Central Bank Independence

Abstract

Alex Cukierman’s paper is a welcome contribution to the new field of “constitutional economics”. Cukierman analyses how much independence will be granted to a central bank, assuming that the degree of independence is chosen rationally by the politicians. The theoretical model in the paper shows how the answer depends on the politicians’ assessment of what the central bank can do to mitigate business cycles, as well as on complicated dynamic calculations regarding the management of the national debt. On the one hand, an independent central bank makes it easier for the current government to sell national debt since the markets will impose a smaller risk premium as compensation for the risk that a politically-dominated central bank may inflate away the debt in the future. Conversely, if the government is hopeful of winning future elections and wishes to retain the option to eventually inflate its national debt, it may prefer a more compliant central bank to cooperate with an inflationary reduction of the real burden of the national debt.