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Political Business Cycles and Central Bank Independence

Author

Listed:
  • John Maloney

    (University of Exeter)

  • Andrew C. Pickering

    (University of Bristol)

  • Kaddour Hadri

    (University of Liverpool)

Abstract

This paper develops a dynamic model of Rational Partisan Business Cycles in which wage contracts overlap elections and wage setters have to make a prediction about the election result. Empirical analysis of 20 OECD countries supports the theoretical implication that left wing incumbents increase output, but increased expectation of a left wing regime reduces it. The model is extended to incorporate the effects of alternative measures of Central Bank Independence (CBI). The measure of objective independence outperforms the other measures and it is found that CBI reduces politically induced business cycles. Copyright Royal Economic Society 2003

Suggested Citation

  • John Maloney & Andrew C. Pickering & Kaddour Hadri, 2003. "Political Business Cycles and Central Bank Independence," Economic Journal, Royal Economic Society, vol. 113(486), pages 167-181, March.
    • Handle: RePEc:ecj:econjl:v:113:y:2003:i:486:p:c167-c181
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    References listed on IDEAS

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    1. Kenneth Rogoff, 1985. "The Optimal Degree of Commitment to an Intermediate Monetary Target," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 100(4), pages 1169-1189.
    2. Kilponen, Juha & Mayes, David & Vilmunen, Jouko, 1999. "Labour Market Flexibility in Northern Europe," ERSA conference papers ersa99pa088, European Regional Science Association.
    3. John Maloney & Bernard Pearson & Andrew Pickering, 2003. "Behind the Cube Rule: Implications of, and Evidence against a Fractal Electoral Geography," Environment and Planning A, , vol. 35(8), pages 1405-1414, August.
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    5. Alex Cukierman, 1992. "Central Bank Strategy, Credibility, and Independence: Theory and Evidence," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262031981, December.
    6. Hadri, Kaddour & Lockwood, Ben & Maloney, John, 1998. "Does Central Bank Independence Smooth the Political Business Cycle in Inflation? Some OECD Evidence," The Manchester School of Economic & Social Studies, University of Manchester, vol. 66(4), pages 377-395, September.
    7. Kenneth Rogoff & Anne Sibert, 1988. "Elections and Macroeconomic Policy Cycles," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 55(1), pages 1-16.
    8. Alberto Alesina, 1987. "Macroeconomic Policy in a Two-Party System as a Repeated Game," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 102(3), pages 651-678.
    9. Alesina, Alberto & Summers, Lawrence H, 1993. "Central Bank Independence and Macroeconomic Performance: Some Comparative Evidence," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 25(2), pages 151-162, May.
    10. 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.
    11. Fredrik Carlsen & Elin F. Pedersen, 1999. "Rational Partisan Theory: Evidence for Seven OECD Economies," Economics and Politics, Wiley Blackwell, vol. 11(1), pages 13-32, March.
    12. Maloney, John & Andrew Pickering & Kaddour Hadri, 2002. "Which Type of Central Bank Smooths the Political Business Cycle?," Royal Economic Society Annual Conference 2002 135, Royal Economic Society.
    13. Forder, James, 1998. "Central Bank Independence--Conceptual Clarifications and Interim Assessment," Oxford Economic Papers, Oxford University Press, vol. 50(3), pages 307-334, July.
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    Cited by:

    1. Ferré, Montserrat & Manzano, Carolina, 2014. "Rational Partisan Theory with fiscal policy and an independent central bank," Journal of Macroeconomics, Elsevier, vol. 42(C), pages 27-37.
    2. Montserrat Ferré & Carolina Manzano, 2020. "Independent Central Banks: Low Inflation at No Cost? A Model with Fiscal Policy," International Journal of Central Banking, International Journal of Central Banking, vol. 16(6), pages 233-286, December.
    3. Ahmet Emrah Tayyar, 2017. "Political Monetary Cycles In Coalition And Single Party Government Periods: A Case Study On Turkey," Annals - Economy Series, Constantin Brancusi University, Faculty of Economics, vol. 6, pages 89-111, December.
    4. Gernot Sieg & Irem Batool, 2012. "Pakistan, Politics and Political Business Cycles," The Pakistan Development Review, Pakistan Institute of Development Economics, vol. 51(2), pages 153-166.
    5. Burton Abrams & Plamen Iossifov, 2006. "Does the Fed Contribute to a Political Business Cycle?," Public Choice, Springer, vol. 129(3), pages 249-262, December.
    6. Barbara Caporale & Tony Caporale, 2008. "Political Regimes and the Cost of Disinflation," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 40(7), pages 1541-1554, October.
    7. Jens Klose, 2012. "Political business cycles and monetary policy revisited–an application of a two-dimensional asymmetric Taylor reaction function," International Economics and Economic Policy, Springer, vol. 9(3), pages 265-295, September.
    8. Michael Berlemann & Gunther Markwardt, 2007. "Unemployment and Inflation Consequences of Unexpected Election Results," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 39(8), pages 1919-1945, December.
    9. Fi̇li̇z Eryilmaz & Mehmet Mercan, 2015. "Political Budget Cycles: Evidence From Turkey," Annals - Economy Series, Constantin Brancusi University, Faculty of Economics, vol. 2, pages 5-14, April.
    10. Jens Klose, 2011. "Political Business Cycles and Monetary Policy Revisited – An Application of a Two-Dimensional Asymmetric Taylor Reaction Function," Ruhr Economic Papers 0286, Rheinisch-Westfälisches Institut für Wirtschaftsforschung, Ruhr-Universität Bochum, Universität Dortmund, Universität Duisburg-Essen.
    11. Eric DUBOIS, 2010. "A Simple Politico-Economic Model to Predict Vote and Growth in France," EcoMod2004 330600045, EcoMod.
    12. Justin Svec & Daniel L. Tortorice, 2022. "Asserting Independence: Optimal Monetary Policy When the Central Bank and Political Authority Disagree," Working Papers 2201, College of the Holy Cross, Department of Economics.
    13. repec:zbw:rwirep:0286 is not listed on IDEAS
    14. Ms. JoAnne Morris & Mr. Tonny Lybek, 2004. "Central Bank Governance: A Survey of Boards and Management," IMF Working Papers 2004/226, International Monetary Fund.

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