On central bank independence and political cycles

Mercedes Haga
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Mercedes Haga: Universidad Diego Portales

Journal of Applied Economics, 2015, vol. 18, 267-296

Abstract: Using a large panel data set, I find that political budget cycles are significantly smaller in countries with de facto central bank independence (CBI). To explain this result and its consequences in the economy, I develop an extended New Keynesian model that incorporates a political economy model of career concerns. I find that CBI mitigates the incumbent’s fiscal decisions. Intuitively, since increases in the interest rate have a negative effect on the reelection probability due to consumption postponement, this discourages expansionary fiscal policies.

Keywords: political budget cycles; career concerns; New Keynesian models; central bank independence; optimal monetary policy (search for similar items in EconPapers)
JEL-codes: D72 E52 E58 (search for similar items in EconPapers)
Date: 2015
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Citations: View citations in EconPapers (9)

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Persistent link: https://EconPapers.repec.org/RePEc:cem:jaecon:v:18:y:2015:n:2:p:267-296

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