Monetary Policy, Delegation and Polarisation
This paper studies the relation between political polarization and delegation of stabilization policy. There is asymmetric information about how the economy works: unlike voters, two political parties know the variance of an employment shock. Prior to an election, each party proposes a central banker to be chosen if the party wins. If political polarization is small, voters will learn the true variance and the central banker and the stabilization policy are the ones most preferred by the median voter. If the political polarization is high, stabilization policy does not reflect the variance but only the preferences of the winning party.
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Volume (Year): 109 (1999)
Issue (Month): 455 (April)
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