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POPULISM, ECONOMIC POLICIES, POLITICAL PRESSURE AND CENTRAL BANK (IN)DEPENDENCE

Donato Masciandaro ()

No 19111, BAFFI CAREFIN Working Papers from BAFFI CAREFIN, Centre for Applied Research on International Markets Banking Finance and Regulation, Universita' Bocconi, Milano, Italy

Abstract: This article discusses the relationships between populism, economic policy design and central bank independence (CBI). Assuming that 1) a macro (banking) shock can occur, 2) the incumbent government can face a trade - off between bail-out and bail-in and can finance its public spending choosing between taxes and debt; 3) an independent central bank design the monetary policy strategy assuming a long run perspective – i.e. welfare function maximization; 3) labour and financial assets represent the citizens endowment, with the possibility of monetary and banking externalities, it is possible that the majority of citizens prefer an overall policy design – including monetary policy - that are different from the social optimal ones. Then if the incumbent government wishes to please the voters, the political pressure measures the difference between the government goals and the central bank choices. The political pressure can be considered a proxy for a contingent demand of CBI reform – a metrics for de facto CBI. If we define as populist any policy that guarantees anti- elites redistribution without regard for longer term distortions, a populist pressure that promote a more politically dependent central bank can arise when the elites are sophisticated investors, while the majority of citizens are unsophisticated investors.

Keywords: Populism; Financial Inequality; Monetary Policy; Central bank Independence; Political Economics (search for similar items in EconPapers)
JEL-codes: D72 D78 E31 E52 E58 E62 (search for similar items in EconPapers)
Pages: 24
Date: 2019
New Economics Papers: this item is included in nep-cba, nep-mac and nep-mon
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