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Institutional Checks and Balances and the Political Control of the Money Supply

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  • Lohmann, Susanne

Abstract

The Nordhaus hypothesis about the political business cycle asserts that elected politicians have incentives to expand the money supply prior to elections to stimulate the economy and thereby engineer their reelection. Central bank independence is widely regarded as an institutional solution to this problem. However, this solution works only if central bankers are not perfect agents of their political principals, perhaps because they are conservative (more inflation-averse). This article proposes an alternative solution: political business cycles may be obstructed by institutional checks and balances. The analysis applies to the Deutsche Bundesbank and has implications for the institutional structure of the future European Central Bank. Copyright 1998 by Royal Economic Society.

Suggested Citation

  • Lohmann, Susanne, 1998. "Institutional Checks and Balances and the Political Control of the Money Supply," Oxford Economic Papers, Oxford University Press, vol. 50(3), pages 360-377, July.
    • Handle: RePEc:oup:oxecpp:v:50:y:1998:i:3:p:360-77
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    Cited by:

    1. Yannick LUCOTTE, 2010. "The Choice of Adopting Inflation Targeting in Emerging Economies: Do Domestic Institutions Matter?," LEO Working Papers / DR LEO 1561, Orleans Economics Laboratory / Laboratoire d'Economie d'Orleans (LEO), University of Orleans.
    2. António Caleiro, 2004. "Economic Policies and Elections. A principal-agent point of view," Notas Económicas, Faculty of Economics, University of Coimbra, issue 20, pages 89-101, December.
    3. Carola Conces Binder, 2021. "Political Pressure on Central Banks," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 53(4), pages 715-744, June.
    4. Giordano, Raffaela & Tommasino, Pietro, 2011. "What determines debt intolerance? The role of political and monetary institutions," European Journal of Political Economy, Elsevier, vol. 27(3), pages 471-484, September.
    5. Gartner, Manfred, 1999. "The election cycle in the inflation bias: evidence from the G-7 countries," European Journal of Political Economy, Elsevier, vol. 15(4), pages 705-725, November.
    6. Alejandro Saporiti & Jorge Streb, 2008. "Separation of powers and political budget cycles," Public Choice, Springer, vol. 137(1), pages 329-345, October.
    7. Lucotte, Yannick, 2010. "The choice of adopting inflation targeting in emerging economies: Do domestic institutions matter?," MPRA Paper 27118, University Library of Munich, Germany.

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