Eijffinger and Schaling (for the sake of brevity, I shall refer to them as ES) have written an interesting and stimulating chapter. For some years now, the literature has paid considerable attention to the measurement of central bank independence and to its relationship with other economic variables. Time therefore has come to look more closely at the factors that explain the degree of central bank independence. In their chapter, ES make an original contribution in this area. On the basis of a formal model, they derive four factors governing the optimal degree of central bank independence. Using the latent-variables method, they then estimate the relationship between the optimal degree of central bank independence and these variables for 19 countries. Finally, they compare the actual with the optimal degree of central bank independence. The estimation period is 1960–93.

The variable ∊ plays a crucial role in the model of ES. This variable measures, or is at any rate a proxy for, the degree of central bank independence. I am not convinced of this, ∊ indicates to what extent price stability carries more weight in the central bank's loss function than in the social loss function. The greater the value of the variable ∊, the greater the degree of central bank independence. In my view, however, independence has primarily to do with the extent to which the central bank is able make decisions without government interference. That is not exactly measured by the variable ∊.