Which Type of Central Bank Smooths the Political Business Cycle?

John Maloney, Andrew Pickering and Kaddour Hadri ()
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John Maloney: University of Exeter

No 135, Royal Economic Society Annual Conference 2002 from Royal Economic Society

Abstract: This paper develops a dynamic model of Rational Partisan Business Cycles, wherein wage contracts overlap elections and wage setters have to make a prediction about the election result. Uncertainty leads to pre- and post-election date output fluctuations. Election result probabilities are imputed and then used to construct variables in electoral uncertainty. Using data from 20 OECD countries over the period 1960-1998 left wing incumbents are found to increase output, but the increased expectation of a left wing regime reduces it. These political effects are found to be offset by Central Bank Independence and in particular, objective independence.

Date: 2002-08-29
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