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Politics and Monetary Policy

  • Ehrmann, Michael
  • Fratzscher, Marcel

How and why do politicians’ preferences about monetary policy differ from the interest rates set by independent central banks? Looking at the European Central Bank, the paper shows that politicians, on average, favor significantly lower interest rates. Three factors explain the different preferences. First, politicians put relatively less weight on inflation (and more on output) in their preferred monetary policy reaction function. Second, politicians’ preferences are affected by political economy motives. Third, different preferences are also, and largely, due to different constituencies, as politicians primarily focus on national economic objectives rather than the euro area as a whole.

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Paper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 8143.

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Date of creation: Dec 2010
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Handle: RePEc:cpr:ceprdp:8143
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  1. Swank, O.H., 1991. "Popularity Functions Based on the Partisan Theory," Papers 9112-g, Erasmus University of Rotterdam - Institute for Economic Research.
  2. Rebecca Hellerstein, 2007. "Is There a Dead Spot? New Evidence on FOMC Decisions Before Elections," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 39(6), pages 1411-1427, 09.
  3. Christian Schultz, 2003. "Information, Polarization and Delegation in Democracy," CESifo Working Paper Series 1104, CESifo Group Munich.
  4. Grier, Kevin B., 1991. "Congressional influence on U.S. monetary policy : An empirical test," Journal of Monetary Economics, Elsevier, vol. 28(2), pages 201-220, October.
  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. Maier, Philipp & Bezoen, Saskia, 2004. "Bashing and supporting central banks: the Bundesbank and the European Central Bank," European Journal of Political Economy, Elsevier, vol. 20(4), pages 923-939, November.
  7. Adam Geršl, 2006. "Political Pressure on Central Banks: The Case of the Czech National Bank (in English)," Czech Journal of Economics and Finance (Finance a uver), Charles University Prague, Faculty of Social Sciences, vol. 56(1-2), pages 18-39, January.
  8. Maier, Philipp & Sturm, Jan-Egbert & de Haan, Jakob, 2002. "Political pressure on the Bundesbank: an empirical investigation using the Havrilesky approach," Journal of Macroeconomics, Elsevier, vol. 24(1), pages 103-123, March.
  9. Waller, Christopher J, 1992. "The Choice of a Conservative Central Banker in a Multisector Economy," American Economic Review, American Economic Association, vol. 82(4), pages 1006-12, September.
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