Who creates poltical business cycles?: (should central banks be blamed?)

Erik Leertouwer and Philipp Maier
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Philipp Maier: Groningen University

No 99E56, Research Report from University of Groningen, Research Institute SOM (Systems, Organisations and Management)

Abstract: Little attention has been paid in most economic studies on political businesscycles to separate the effects of fiscal and monetary policy. We attempt to as-sess the effect of monetary policy in a panel model for 16 OECD countries.To answer the question whether central banks actively create political busi-ness cycles we focus on the short-term interest rate as a proxy for the use ofmonetary instruments. Our results indicate that central banks should not beblamed for creating political business cycles as we do not find any evidencefor cyclical behavior in the short-term interest rate. This conclusion holds nomatter whether central banks are independent or not or are constrained bythe exchange rate system in force.

Date: 1999
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