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Political Business Cycles and Central Bank Independence


  • John Maloney

    (University of Exeter)

  • Andrew C. Pickering

    (University of Bristol)

  • Kaddour Hadri

    (University of Liverpool)


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

    1. Kenneth Rogoff, 1985. "The Optimal Degree of Commitment to an Intermediate Monetary Target," The Quarterly Journal of Economics, Oxford University Press, 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, Pion Ltd, London, vol. 35(8), pages 1405-1414, August.
    4. 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.
    5. Alberto Alesina & Nouriel Roubini, 1992. "Political Cycles in OECD Economies," Review of Economic Studies, Oxford University Press, vol. 59(4), pages 663-688.
    6. Kenneth Rogoff & Anne Sibert, 1988. "Elections and Macroeconomic Policy Cycles," Review of Economic Studies, Oxford University Press, vol. 55(1), pages 1-16.
    7. Alberto Alesina, 1987. "Macroeconomic Policy in a Two-Party System as a Repeated Game," The Quarterly Journal of Economics, Oxford University Press, vol. 102(3), pages 651-678.
    8. 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.
    9. 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.
    10. Roubini, Nouriel & Alesina, Alberto, 1992. "Political Cycles in OECD Economies," Scholarly Articles 4553025, Harvard University Department of Economics.
    11. 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.
    12. Alesina, Alberto, 1987. "Macroeconomic Policy in a Two-party System as a Repeated Game," Scholarly Articles 4552531, Harvard University Department of Economics.
    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.
    14. William D. Nordhaus, 1975. "The Political Business Cycle," Review of Economic Studies, Oxford University Press, vol. 42(2), pages 169-190.
    15. Alesina, Alberto, 1988. "Credibility and Policy Convergence in a Two-Party System with Rational Voters," American Economic Review, American Economic Association, vol. 78(4), pages 796-805, September.
    16. Engle, Robert F, 1982. "Autoregressive Conditional Heteroscedasticity with Estimates of the Variance of United Kingdom Inflation," Econometrica, Econometric Society, vol. 50(4), pages 987-1007, July.
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    Cited by:

    1. JoAnne Morris & Tonny Lybek, 2004. "Central Bank Governance; A Survey of Boards and Management," IMF Working Papers 04/226, International Monetary Fund.
    2. 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.
    3. Ferré Carracedo, Montserrat & Manzano, Carolina, 2013. "Independent Central Banks: Low inflation at no cost?: A model with fiscal policy," Working Papers 2072/222196, Universitat Rovira i Virgili, Department of Economics.
    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. 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.
    7. 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.
    8. 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.
    9. Eric DUBOIS, "undated". "A Simple Politico-Economic Model to Predict Vote and Growth in France," EcoMod2004 330600045, EcoMod.
    10. repec:zbw:rwirep:0286 is not listed on IDEAS

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