Comments and Discussion (When Does Policy Reform Work? the Case of Central Bank Independence‪)‬

COMMENT BY ALBERTO ALESINA This paper by Daron Acemoglu and his coauthors addresses an important topic. In general terms, the question is when and how policy reforms are successful or unsuccessful. More specifically, the paper focuses on central bank independence (CBI), and its goal is to shed some light on the inconclusive results in the literature regarding the benefits of CBI on inflation. I will focus relatively briefly on the authors' model and more extensively on the empirical evidence. I conclude that the model is not especially appropriate for studying this issue and that the empirical evidence is not robust. I-HE MODEL. What models have been used in the literature to study the pros and cons of CBI? The first was the model of time inconsistency and inflation bias developed by Finn Kydland and Edward Prescott and later extended by Robert Barro and David Gordon. (1) The source of inflation in all these models is an interplay between wage setting behavior and the incentive of the central bank to "surprise" the economy with an inflation shock to reduce unemployment. Kenneth Rogoff pointed out how an inflation-averse and independent central banker can improve on the tradeoff between rules and discretion. (2)