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Institutional Checks and Balances and the Political Control of the Money Supply

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  • Lohmann, Susanne
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    Abstract

    The Nordhaus hypothesis about the political business cycle asserts that elected politicians have incentives to expand the money supply prior to elections to stimulate the economy and thereby engineer their reelection. Central bank independence is widely regarded as an institutional solution to this problem. However, this solution works only if central bankers are not perfect agents of their political principals, perhaps because they are conservative (more inflation-averse). This article proposes an alternative solution: political business cycles may be obstructed by institutional checks and balances. The analysis applies to the Deutsche Bundesbank and has implications for the institutional structure of the future European Central Bank. Copyright 1998 by Royal Economic Society.

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    Bibliographic Info

    Article provided by Oxford University Press in its journal Oxford Economic Papers.

    Volume (Year): 50 (1998)
    Issue (Month): 3 (July)
    Pages: 360-77

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    Handle: RePEc:oup:oxecpp:v:50:y:1998:i:3:p:360-77

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    Cited by:
    1. Yannick Lucotte, 2010. "The choice of adopting inflation targeting in emerging economies: Do domestic institutions matter?," Post-Print hal-00539713, HAL.
    2. Gartner, Manfred, 1999. "The election cycle in the inflation bias: evidence from the G-7 countries," European Journal of Political Economy, Elsevier, vol. 15(4), pages 705-725, November.
    3. Alejandro Saporiti & Jorge Streb, 2008. "Separation of powers and political budget cycles," Public Choice, Springer, vol. 137(1), pages 329-345, October.
    4. Fabio Padovano & Grazia Sgarra & Nadia Fiorino, 2003. "Judicial Branch, Checks and Balances and Political Accountability," Constitutional Political Economy, Springer, vol. 14(1), pages 47-70, March.
    5. Raffaela Giordano & Pietro Tommasino, 2009. "What determines debt intolerance? The role of political and monetary institutions," Temi di discussione (Economic working papers) 700, Bank of Italy, Economic Research and International Relations Area.

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