Public Inflation Aversion and the Political Economy of Macroeconomic Policymaking

Do the macroeconomic priorities of citizens differ across countries? If so, what accounts for this variation and what are its consequences for explanations of the choice of monetary institutions, macroeconomic policy, and international monetary cooperation? This article uses survey data from twenty advanced economies to examine individual preferences about macroeconomic priorities. The analysis establishes three key findings. First, the results suggest that economic context, defined by inflation and unemployment performance, has a substantial impact on the public's economic objectives in a way that is broadly consistent with the specification of utility/loss functions in the theoretical political economy literature. Second, the results suggest that there is significant cross-country variation in inflation aversion, controlling for economic context. Third, some of this variation is accounted for by national-level factors affecting the aggregate costs of inflation and unemployment. These results have significant implications for optimal monetary policymaking, the explanation of variation in economic outcomes, and for accounts of the choice of institutional frameworks for policymaking.I thank the Bank of England, the Center for Basic Research in the Social Sciences, and the Institution for Social and Policy Studies for research support, and Jim Alt, Andrew Bailey, Bill Bernhard, Lawrence Broz, John Freeman, Jeff Frieden, Jim Granato, Shigeo Hirano, David Lake, Jeff Lax, Simon Price, Rose Razaghian, Ron Rogowski, David Stasavage, Gabriel Sterne, Mike Tomz, Jim Vreeland, the editor, and two anonymous reviewers for helpful comments. All views expressed are those of the author and do not represent those of the Bank of England.