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Central banks' priorities and the left/right partisanship of exchange rates

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  • Sadeh, Tal
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    Abstract

    This study argues that when central banks subordinate all policy goals to achieving price stability greater central bank independence encourages left-wing governments to seek greater exchange rate stability. Such central bank policy priorities make the Left's preferred distributive policies more dependent on the effectiveness of fiscal policy, which under high capital mobility increases with exchange rate stability. In contrast, right-wing governments put greater emphasis on market adjustments and price stability. Hypotheses are tested by estimating the sensitivity of exchange rate variation to partisanship, central bank independence, and the salience of price stability, using a Prais-Winsten estimator and Instrumented Variables, run on pooled cross-section time-series data from 22 OECD countries during 1990-2004.

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    Bibliographic Info

    Article provided by Elsevier in its journal Journal of Policy Modeling.

    Volume (Year): 33 (2011)
    Issue (Month): 2 (March)
    Pages: 183-194

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    Handle: RePEc:eee:jpolmo:v:33:y:2011:i:2:p:183-194

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    Web page: http://www.elsevier.com/locate/inca/505735

    Related research

    Keywords: Exchange rates Partisanship Prais-Winsten estimator Central bank independence Price stability;

    References

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    1. Moons, Cindy & Garretsen, Harry & van Aarle, Bas & Fornero, Jorge, 2007. "Monetary policy in the New-Keynesian model: An application to the Euro Area," Journal of Policy Modeling, Elsevier, vol. 29(6), pages 879-902.
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    5. Frankel, Jeffrey & Rose, Andrew K., 2001. "An Estimate of the Effect of Common Currencies on Trade and Income," Working Paper Series rwp01-013, Harvard University, John F. Kennedy School of Government.
    6. Bernhard, William & Broz, J. Lawrence & Clark, William Roberts, 2002. "The Political Economy of Monetary Institutions," International Organization, Cambridge University Press, vol. 56(04), pages 693-723, September.
    7. Cukierman Alex, 1992. "Central Bank Strategy, Credibility, And Independance: Theory And Evidence," Journal des Economistes et des Etudes Humaines, De Gruyter, vol. 3(4), pages 10, December.
    8. Grubel, Herbert, 2005. "Small country benefits from monetary union," Journal of Policy Modeling, Elsevier, vol. 27(4), pages 509-523, June.
    9. Alberto Alesina & Nouriel Roubini & Gerald D. Cohen, 1997. "Political Cycles and the Macroeconomy," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262510944, December.
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