Politics and Monetary Policy

Michael Ehrmann () and Marcel Fratzscher ()

No 8143, CEPR Discussion Papers from C.E.P.R. Discussion Papers

Abstract: How and why do politicians’ preferences about monetary policy differ from the interest rates set by independent central banks? Looking at the European Central Bank, the paper shows that politicians, on average, favor significantly lower interest rates. Three factors explain the different preferences. First, politicians put relatively less weight on inflation (and more on output) in their preferred monetary policy reaction function. Second, politicians’ preferences are affected by political economy motives. Third, different preferences are also, and largely, due to different constituencies, as politicians primarily focus on national economic objectives rather than the euro area as a whole.

Keywords: delegation; European Central Bank; interest rates; monetary policy; time inconsistency (search for similar items in EconPapers)
JEL-codes: D72 D73 E43 E52 E58 (search for similar items in EconPapers)
Date: 2010-12
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Journal Article: Politics and Monetary Policy (2011)
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