Belke, Ansgar; Potrafke, Niklas:

Does Government Ideology Matter in Monetary Policy? A Panel Data Analysis for OECD Countries

In: DIW Diskussionspapiere = Discussion Papers / Deutsches Institut für Wirtschaftsforschung, (2011) ; Nr. 1180, S. 1-30
ISSN: 1433-0210
Zeitschriftenaufsatz / Fach: Wirtschaftswissenschaften
Fakultät für Wirtschaftswissenschaften » Fachgebiet Volkswirtschaftslehre » Makroökonomik
This paper examines whether government ideology has influenced monetary policy in OECD
countries. We use quarterly data in the 1980.1-2005.4 period and exclude EMU countries.
Our Taylor-rule specification focuses on the interactions of a new time-variant index of
central bank independence with government ideology. The results show that leftist
governments have somewhat lower short-term nominal interest rates than rightwing
governments when central bank independence is low. In contrast, short-term nominal
interest rates are higher under leftist governments when central bank independence is high.
The effect is more pronounced when exchange rates are flexible. Our findings are
compatible with the view that leftist governments, in an attempt to deflect blame of their
traditional constituencies, have pushed market-oriented policies by delegating monetary
policy to conservative central bankers.