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Political Business Cycles and Monetary Policy Revisited – An Application of a Two-Dimensional Asymmetric Taylor Reaction Function

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  • Jens Klose

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Abstract

This paper uses two-dimensional asymmetric Taylor reaction functions for 16 OECD-countries to account for different reactions to the inflation rate and output by central banks before or after an election of the fiscal authorities in the respective country. Important for such an investigation is not only the period before or after an election takes place but also whether the inflation rate and output are below or above their target or potential value because this information shows whether the central bank systematically deviates from the Taylor rule. Using a Panel-GMM we observe that in the OECD-countries there are political business cycles in monetary policy with respect to the inflation and output response. However, the supporting time horizon differs between both exogenous indicators and state of variables.

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Paper provided by Rheinisch-Westfälisches Institut für Wirtschaftsforschung, Ruhr-Universität Bochum, Universität Dortmund, Universität Duisburg-Essen in its series Ruhr Economic Papers with number 0286.

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Length: 35 pages
Date of creation: Oct 2011
Date of revision:
Handle: RePEc:rwi:repape:0286

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Keywords: Political business cycle; monetary policy; Taylor rule; asymmetries; Panel- GMM;

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