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Alex Cukierman, one of the pioneers of applying game theory to the study of macroeconomics, passed away in October 2023. This column, written by a friend and co-author, highlights the main academic contributions from a career spanning almost four decades.
Alex Cukierman passed away in October 2023, at the age of 85. He graduated from MIT in 1972 with Franco Modigliani, was Professor of Economics at Tel Aviv University for about three decades, and a Research Fellow at CEPR. He also held several visiting positions and served on the Monetary Policy Committee of the Bank of Israel. His contributions to macroeconomics, including two books, three edited volumes, and more than 80 journal articles, spanning almost four decades.
Alex was one of the pioneers of applying game theory to study macroeconomics. Together with Alesina, Meltzer, Persson, Tabellini, he was among the first to model policymakers’ decisions as strategic choices, shaped by the possible reactions of the opponents and by the institutional context. Likewise, he was fascinated by models featuring time-inconsistency of the optimal policy, a fundamental notion developed by Kydland and Prescott, and applied the idea to a host of diverse macroeconomic situations. Alex was also serious about empirically testing the theories he considered important. He was perhaps best known for his empirical indices of central bank independence and the analysis of its effects on economic performance. His work spawned a large number of empirical applications where those indices were used, and inspired new research where the independence of institutions, like regulatory bodies, proves essential for economic performance.
In this short note I will review some of Alex’s papers, the ones that highlight his main academic contributions, with no pretence of providing an encompassing summary of all of them, and conclude with a personal note.
Graduating in the year in which Lucas’ “Expectations and the neutrality of money” was published, Alex was fascinated by the power of the new framework and set to work to extend Lucas’ work. He wrote several papers that deepened our understanding of relative price variability and its relationship with the distributions of inflation and of inflation expectations. In Cukierman and Wachtel (1979), Alex and his co-author extended Lucas’ island model to accommodate heterogeneity in inflation expectations. In Cukierman (1977), he tested various theories on how expectations are formed using inflation expectations data estimated from financial data (not an obvious exercise at the time). The latter illustrates Alex’s view of economics as a science, and the great importance he attached to confronting theories with data. 1 After about a decade working in the area he surveyed the imperfect-information approach to inflation and output in the book, Inflation, Stagflation, Relative Prices, and Imperfect Information (Cukierman 1984).
During the 1980s Alex understood the power of new developments in game theory, involving imperfect information and time-inconsistency, and started applying them to study how institutions shaped policymakers’ and voters’ behaviour, a feature that would become the hallmark of his research. The novelty was to think of policymakers as strategic agents who interact with one or more opponents (another policymaker, a labour union, a rival political party), while taking into account possible reactions by the other party. Such reactions act as a new set of constraints in the economic model and thus affect equilibrium outcomes, compared to analyses where policymakers are ‘benevolent planners’. In this area, he developed several insightful models to study a broad range of issues, spanning from the credibility of anti-inflationary policies to the implementation of controversial reforms.
One of Alex’s most cited contributions, with Allan, studies the optimal degree of ‘transparency’ (‘ambiguity’ in their language) in the central bank’s own actions Meltzer (Cukierman and Meltzer 1986b). The authors used a simple setup where the policymaker faces a rational public and only unanticipated policy actions are effective in stabilising the business cycle. A rational public does its best to unveil the policymaker’s true motives, using optimal filtering techniques. In response to this behaviour, the policymaker deliberately introduces noise in its actions, in order to impair the private agents’ learning. Such noise increases the policymaker’s ability to stabilise output at the cost of making the economy more volatile. The equilibrium reveals that the policymaker has an incentive not to be fully transparent about its own motives, in order to be able to produce a policy surprise in the times where it is most needed. This paper is a gem: a simple idea rigorously formalised by a dynamic rational expectations model where the policymaker and the public keep chasing each other’s intentions while tracking the aggregate shocks. The seminal paper, which might have appeared somewhat abstract and technical at first, offered an explicit analysis of central bank’s communication transparency, a topic that would become relevant to policymakers a few decades later and the subject of a voluminous literature.
Alex was very interested in political economy, mostly as a way to understand how institutions are shaped by voters’ choices and how they are determined. He often talked about his paper with Mariano Tommasi (Cukierman and Tommasi 1998), which he considered interesting because the result was not ‘intuitive’, i.e. hard to see without a thorough analysis of the model,. The paper examines why policy changes are often implemented by ‘unlikely’ agents (e.g. Nixon visiting China despite his anti-communist stance). The idea is that an unlikely agent, who typically opposes such policies, can credibly signal to the public that the situation which the politician privately observes justifies the policy. The public would not believe a likely agent as they would suspect that the agent was just pushing for his preferred policy outcome even if the situation is not what the politician claims it to be. Alesina and Cukierman (1990) also study the problem of policy choice by a politician who has private information about his own personal preferences. Their main premise is that politicians are motivated by two objectives: being re-elected and choosing the policies that are most preferred by their constituency. To increase the chance of re-election, politicians need to deviate from their most preferred policies to attract more distant voters. The main insight is that the optimal strategy for politicians is to choose procedures which make it difficult for voters to pinpoint their preferences with absolute precision. Thus, politicians may prefer to be ‘ambiguous’, an idea related to Cukierman and Meltzer’ paper on ambiguity. 2
Alex’s unstoppable curiosity to understand the real world by means of explicit mathematical models yielded many more insightful contributions. Cukierman, Edwards, and Tabellini (1992) pioneered the important idea that political instability and polarisation discourage governments from investing in tax capacity. This hypothesis was developed theoretically and tested empirically, to explain persistent reliance on inefficient sources of revenues (seigniorage and trade taxes) in countries with unstable and polarised political environments, like many countries in Latin America. 3
In Cukierman (1991), Alex turns to the behaviour of voters and proposes an explanation for the tendency of voters to vote more heavily for candidates who enjoy a greater chance of winning. The idea is that voters care not only about policies but also about the ability of the candidates. Some voters are informed and hence, if they support certain candidates, the uninformed voters reason that the candidates are more likely to have high ability and hence are willing to support them as well. 4 As is common in the literature, Alex’s work on political economy utilised the classic median voter paradigm (MVP) to derive predictions about the policies that would be chosen in a democratic system. 5 Cukierman and Spiegel (2003) study the conditions under which the MVP provides useful guidance for policy choices under a fully specified model of representative democracy, and when it does not and apply the analysis to the influential Meltzer and Richard (1981) theory of the size of government.
I would describe Alex as a fine applied macro theorist, always thinking about new economic mechanisms to explain the forces behind different macroeconomic policies. Yet, the breadth of his interests and the strength of his determination to push the frontier are illustrated by the fact that his most-cited paper, Cukierman, Webb, and Neyapti (1992), is a measurement exercise. It is a pioneering contribution where he and his co-authors construct several measures of central bank independence for both advanced and emerging economies and related them to inflation outcomes. Measuring an abstract notion such as the ‘degree of independence’ of central banks from the ‘executive power’ is not an easy accomplishment. Alex was not afraid of attempting such a task, delving into the institutional details of many different countries, a mission on which he worked for nearly two decades. Alex and his co-authors were among the first to recognise (and deal with) the many difficulties of quantifying ‘formal independence’ for 72 countries, as outlined in laws and regulations, and testing whether these indices agreed with alternative measures of actual (de facto) independence, as captured by central bank turnover and questionnaires. The results showed that higher central bank independence, in a legal sense, is associated with lower inflation in advanced economies, while in emerging economies, a lower turnover of central bank governors predicts lower inflation rates. 6 The analysis also included an extensive exploration of the correlation of central bank independence and the performance of real variables such as growth and productivity (see Cukierman, Kalaitzidakis, Summers, and Webb 1993).
His classic book, Central Bank Strategy, Credibility, and Independence: Theory and Evidence (Cukierman 1992), summarises several theoretical results on models of monetary policy credibility and central bank independence, as well as several empirical findings. The book served generations of students wanting to understand central bank behaviour and how it affects inflation and the business cycle. Alex’s interest in central banking was not limited to the intellectual side. He served on the Bank of Israel’s Monetary Policy Committee between 2011 and 2015 and maintained a scholarly interest in the institutional features of monetary institutions for many years, writing several papers on the topic. 7
During the 1990s, as several countries were designing the institutions to guide the future European Monetary Union, I was very fortunate to cross Alex’s path and discuss several aspects of this unfolding historic process with him. One question that attracted our attention concerned the interactions between labour unions and ‘conservative’ central bankers. 8 In canonical models with atomistic agents there is no long- run relation between real variables (e.g. unemployment) and inflation, i.e. the long-run Phillips curve is vertical. We used a simple game-theoretic setup to study how alternative off-equilibrium threats by the central bank might affect wage setting behaviour and employment in the presence of non-atomistic wage setters, and give rise to a non-vertical long run Phillips curve. We believed that understanding the interactions between monetary policy and labour markets was important for Europe, where several countries had rather centralised wage negotiations. In Cukierman and Lippi (1999), we explored these possibilities, and presented some evidence on the model’s main prediction that a more inflation averse central bank might lead (non-atomistic) labour unions to be more aggressive in their wage demands.
In Cukierman and Lippi (2001) we applied our model to investigate how joining a monetary union would alter the wage setters’ incentives. 9 We showed that the switch from national monetary policies to a common monetary policy affects both inflation and unemployment, even when all structural parameters of the economy and of unions’ and policymakers’ preferences remain the same. The benchmark case of a monetary union between identical countries suggests that the switch to a monetary union is likely to make labour unions more aggressive, increasing unemployment. Alex continued to work on the topic and produced some very nice papers that consider fiscal-monetary interactions as well as unionized labour markets, in Coricelli, Cukierman, and Dalmazzo (2006) and Cukierman and Dalmazzo (2006).
Alex never stopped working, until the very end of his life, and never stopped paying attention to the challenges of the times he lived in. A hallmark of his work is that so many of his papers were not only academically sharp, but also timely and policy relevant. He studied inflation in the 1970s, central bank reforms in the 1990s, and financial crises during the 2000s, including one paper on the Covid-19 emergency. 10 This reflects his vivid interest in the world that surrounded him, and the belief that economics helps us understand it.
The alert reader will have noticed that Alex graduated from MIT when he was 34. This long journey had not been his choice. He was born in Paris in 1938, while his family was escaping from Poland towards the south of Europe. His father was killed in the journey. Soon after, his mother left him with a Russian nanny in a village on the Pyrenees, in the hope to save him from the Nazi horrors. His first words were in Russian, and when he reunited with his mom at the end of the war, he did not speak her language. They then set sail towards Palestine, but were interned by the British forces in a Cyprus camp, where they spent almost two years. Shortly after arriving in Palestine, he witnessed Israel’s Independence Day, in 1948. He had memories of seeing joyous people celebrating in the streets, without understanding their language, and without a clear idea of what was happening. I was in awe when he talked about these difficult times, and fascinated by his spirit, which never lost the hope of a better future. In retrospect, I do not recall ever seeing him angry.
Alex was a great scholar. He asked many questions, from all sorts of economic models to the types of Italian coffees, because he was eager to learn as much as he could. It all came from pure curiosity that continued till the very end. He was also very generous and had a great sense of humour, never taking himself seriously and never taking offense. People loved him everywhere he went because he was a good person and a wonderful scholar. In my youth, he would host me in his house in Ramat Hasharon, so that we could keep talking about our projects for as long as we could. I learned from him to look at problems from different angles, not to stop when the first results look encouraging, not to be afraid to ask questions, and to always apply high standards (especially to your own work). He loved talking to people he disagreed with, and the discussions could be very long! I once tried to cut short a discussion by saying that he had convinced me of his point. He then turned the table and told me “ok, then let me develop the counter-argument you were trying to make”. The anecdote shows a trait of his personality that I learned to appreciate through the years. Looking at an argument from all possible angles was not just a game for him, or something he did to show how clever he was. This was to make sure he fully understood the issues deeply. He had a very gentle way of debating, that I wish I had learnt. He has had a huge influence on my research attitudes and on the professional life of his students. The memory of his passion for economics, and of his generosity, will be forever an inspiration for me and, I believe, for all those who had the privilege of knowing him.
Author’s note: The memoriam was originally written for the Israeli Economic Quarterly. I thank Heski Bar Isaac, Alberto Dalmazzo, Andrej Mijakovic, Assaf Razin, Guido Tabellini, and Yossi Spiegel, for useful feedback on an early draft.
Alesina, A and A Cukierman (1990), “The politics of ambiguity”, The Quarterly Journal of Economics 105 (4): 829–850.
Ben-Shahar, H and A Cukierman (1973), “The term-structure of interest rates and expectations of price increase and devaluation”, The Journal of Finance 28 (3): 567–575.
Besley, T and T Persson (2011), Pillars of Prosperity: The Political Economics of Development Clusters, Princeton University Press.
Brunner, K, A Cukierman, and A H Meltzer (1980), “Stagflation, persistent unemployment and the permanence of economic shocks”, Journal of Monetary Economics 6 (4): 467–492.
Brunner, K, A Cukierman, and A H Meltzer (1983), “Money and economic activity, inventories and business cycles”, Journal of Monetary Economics 11 (3): 281–319.
Coricelli, F, A Cukierman, and A Dalmazzo (2006), “Monetary institutions, monopolistic competition, unionized labor markets and economic performance”, Scandinavian Journal of Economics 108 (1): 39–63.
Cukierman, A (1977), “A test of expectational processes using information from the capital markets-the israeli case”, International Economic Review, 737–753.
Cukierman, A (1979), “The relationship between relative prices and the general price level: a suggested interpretation”, The American Economic Review 69 (3): 444–447.
Cukierman, A (1980), “The effects of wage indexation on macroeconomic fluctuations”, Journal of Monetary Economics (6).
Cukierman, A (1982), “Relative price variability, inflation and the allocative efficiency of the price system”, Journal of Monetary Economics 9 (2): 131–162.
Cukierman, A (1984), Inflation, Stagflation, Relative Prices, and Imperfect Information, Cambridge University Press.
Cukierman, A (1991), “Asymmetric information and the electoral momentum of public opinion polls”, Public Choice 70 (2): 181–213.
Cukierman, A (1992), Central Bank Strategy, Credibility, and Independence: Theory and Evidence, The MIT Press.
Cukierman, A (2008), “Central bank independence and monetary policymaking institutions—past, present and future”, European Journal of Political Economy 24, 722–736.
Cukierman, A (2009), “The great depression, the current crisis and old versus new Keynesian thinking: What have we learned and what remains to be learned?”.
Cukierman, A (2013), “Monetary policy and institutions before, during, and after the global financial crisis”, Journal of Financial Stability 9 (3): 373–384.
Cukierman, A and A Dalmazzo (2006), “Fiscal-monetary policy interactions in the presence of unionized labor markets”, International Tax and Public Finance 13, 411–435.
Cukierman, A, S Edwards, and G Tabellini (1992), “Seigniorage and political instability", American Economic Review 82 (3): 537–55.
Cukierman, A and Y Izhakian (2015), “Bailout uncertainty in a microfounded general equilibrium model of the financial system”, Journal of Banking & Finance 52, 160–179.
Cukierman, A, P Kalaitzidakis, L H Summers, and S B Webb (1993), “Central bank inde- pendence, growth, investment, and real rates”, Carnegie-Rochester Conference Series on Public Policy, Vol. 39, pp. 95–140, Elsevier.
Cukierman, A and L Leiderman (1984), “Price controls and the variability of relative prices,” Journal of Money, Credit and Banking 16 (3): 271–284.
Cukierman, A and F Lippi (1999), “Central bank independence, centralization of wage bar- gaining, inflation and unemployment: Theory and some evidence”, European Economic Review 43 (7): 1395–1434.
Cukierman, A and F Lippi (2001), “Labour markets and monetary union: a strategic analysis”, The Economic Journal 111 (473): 541–565.
Cukierman, A and A H Meltzer (1986a), “A positive theory of discretionary policy, the cost of democratic government and the benefits of a constitution”, Economic Inquiry 24 (3): 367–388.
Cukierman, A and A H Meltzer (1986b), “A theory of ambiguity, credibility, and inflation under discretion and asymmetric information”, Econometrica: Journal of the Econometric Society, 1099–1128.
Cukierman, A and A H Meltzer (1989), “A political theory of government debt and deficits in a Neo-Ricardian framework”, The American Economic Review, 713–732.
Cukierman, A, G P Miller, and B Neyapti (2002), “Central bank reform, liberalization and inflation in transition economies—an international perspective”, Journal of Monetary Economics 49 (2): 237–264.
Cukierman, A and Y Spiegel (2003), “When is the median voter paradigm a reasonable guide for policy choices in a representative democracy?", Economics and Politics 15 (3): 247–284.
Cukierman, A and M Tommasi (1998), “When does it take a Nixon to go to China?", American Economic Review, 180–197.
Cukierman, A and P Wachtel (1979), “Differential inflationary expectations and the variability of the rate of inflation: theory and evidence”, The American Economic Review 69 (4): 595–609.
Cukierman, A and P Wachtel (1982), “Relative price variability and nonuniform inflationary expectations”, Journal of Political Economy 90 (1): 146–157.
Cukierman, A and S B Webb (1995), “Political influence on the central bank: international evidence”, The World Bank Economic Review 9 (3): 397–423.
Cukierman, A, S B Webb, and B Neyapti (1992), “Measuring the independence of central banks and its effect on policy outcomes”, The World Bank Economic Review 6 (3): 353–398.
Meltzer, A, A Cukierman, and S Richard (1991), Political Economy, Encyclopædia metropolitana, Oxford University Press.
Meltzer, A H and S F Richard (1981), “A rational theory of the size of government”, Journal of Political Economy 89 (5): 914–927.
Rogoff, K (1985), “The optimal degree of commitment to an intermediate monetary target”, The Quarterly Journal of Economics 100 (4): 1169–1189.
