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Government ideology and monetary policy in OECD countries

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  • Dodge Cahan
  • Luisa Dörr
  • Niklas Potrafke
  • Luisa Dörr

Abstract

We examine the extent to which government ideology has influenced monetary policy in OECD countries since the 1970s. In line with important changes in the global economy and differences across countries, regression results yield heterogeneous inferences depending on the time period and the exchange rate regime/central bank dependence of the countries in the sample. Over the 1972-2010 period, Taylor rule specifications do not suggest a relationship between government ideology and monetary policy as measured by the short-term nominal interest rate or the rate of monetary expansion minus GDP trend growth. Monetary policy was, however, associated with government ideology in the 1990s: short-term nominal interest rates were lower under leftwing than rightwing governments when central banks depended on the directives of the government and exchange rates were flexible. Very independent central banks, however, raised interest rates when leftwing governments were in office. We describe the historical evidence for several individual countries.

Suggested Citation

  • Dodge Cahan & Luisa Dörr & Niklas Potrafke & Luisa Dörr, 2019. "Government ideology and monetary policy in OECD countries," CESifo Working Paper Series 7549, CESifo.
  • Handle: RePEc:ces:ceswps:_7549
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    Cited by:

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    2. Federico M. Giesenow & Jakob de Haan, 2019. "The influence of government ideology on monetary policy: New cross‐country evidence based on dynamic heterogeneous panels," Economics and Politics, Wiley Blackwell, vol. 31(2), pages 216-239, July.
    3. Fraccaroli, Nicolò & Giovannini, Alessandro & Jamet, Jean-Francois & Persson, Eric, 2022. "Ideology and monetary policy: the role of political parties’ stances in the ECB’s parliamentary hearings," Working Paper Series 2655, European Central Bank.
    4. Liu, Heng & Luo, Jin-hui, 2022. "Legacy of ideology: The enduring effect of CEOs’ socialist ideological imprint on private firms’ employee-related CSR," Journal of Business Research, Elsevier, vol. 147(C), pages 491-504.
    5. Devasmita Jena & Ishika Kataruka, 2022. "Monetary Response to Oil Price Shock in Asian Oil Importing Countries: Evaluation of Inflation Targeting Framework," Journal of Quantitative Economics, Springer;The Indian Econometric Society (TIES), vol. 20(4), pages 809-825, December.
    6. Jamus Jerome Lim, 2021. "The limits of central bank independence for inflation performance," Public Choice, Springer, vol. 186(3), pages 309-335, March.
    7. Kulvinder Purewal & Hazwan Haini, 2022. "Re-examining the effect of financial markets and institutions on economic growth: evidence from the OECD countries," Economic Change and Restructuring, Springer, vol. 55(1), pages 311-333, February.
    8. Fraccaroli, Nicolò & Giovannini, Alessandro & Jamet, Jean-François & Persson, Eric, 2022. "Ideology and monetary policy. The role of political parties’ stances in the European Central Bank’s parliamentary hearings," European Journal of Political Economy, Elsevier, vol. 74(C).

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    More about this item

    Keywords

    government ideology; monetary policy; partisan politics; panel data;
    All these keywords.

    JEL classification:

    • D72 - Microeconomics - - Analysis of Collective Decision-Making - - - Political Processes: Rent-seeking, Lobbying, Elections, Legislatures, and Voting Behavior
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies
    • C23 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Models with Panel Data; Spatio-temporal Models

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