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On Central Bank Independence and Political Cycles

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  • Mercedes Haga

Abstract

Using a large panel data set, I find that political budget cycles are significantly smaller in countries with de facto central bank independence (CBI). To explain this result and its consequences in the economy, I develop an extended New Keynesian model that incorporates a political economy model of career concerns. I find that CBI mitigates the incumbent's fiscal decisions. Intuitively, since increases in the interest rate have a negative effect on the reelection probability due to consumption postponement, this discourages expansionary fiscal policies.

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  • Mercedes Haga, 2015. "On Central Bank Independence and Political Cycles," Journal of Applied Economics, Taylor & Francis Journals, vol. 18(2), pages 267-295, November.
    • Handle: RePEc:taf:recsxx:v:18:y:2015:i:2:p:267-295
    DOI: 10.1016/S1514-0326(15)30012-X
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    Citations

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    Cited by:

    1. Jacek LEWKOWICZ & Katarzyna METELSKA-SZANIAWSKA, 2021. "De Jure and De Facto Institutions: Implications for Law and for Economics," Ekonomista, Polskie Towarzystwo Ekonomiczne, issue 6, pages 758-776.
    2. Dascher-Preising, Fabienne & Greiner, Alfred, 2023. "Monetary-fiscal policy relations in the euro area: The impact on the primary balance," Journal of Economic Behavior & Organization, Elsevier, vol. 216(C), pages 1-9.
    3. Crombach, Lamar & Bohn, Frank & Sturm, Jan-Egbert, 2024. "The “Benefits” of being small: Loose fiscal policy in the European Monetary Union," Journal of Public Economics, Elsevier, vol. 234(C).
    4. Strong, Christine & Gakpa, Lewis-Landry, 2023. "Crisis babies, inflation experience, and the electoral cycle evidence from Africa," Finance Research Letters, Elsevier, vol. 58(PD).
    5. Christine Strong, 2024. "What type of central banker dampens the political business cycle? The case of Africa," International Journal of Finance & Economics, John Wiley & Sons, Ltd., vol. 29(2), pages 1920-1946, April.
    6. D. Masciandaro, 2019. "What Bird Is That? Central Banking And Monetary Policy In The Last Forty Years," BAFFI CAREFIN Working Papers 19127, BAFFI CAREFIN, Centre for Applied Research on International Markets Banking Finance and Regulation, Universita' Bocconi, Milano, Italy.
    7. Strong, Christine & Yayi, Constant L., 2024. "Do central bankers' characteristics matter for Africa? Ethnic favoritism, fractionalization, and inflation," International Review of Financial Analysis, Elsevier, vol. 94(C).
    8. Justin Svec & Daniel L. Tortorice, 2022. "Asserting Independence: Optimal Monetary Policy When the Central Bank and Political Authority Disagree," Working Papers 2201, College of the Holy Cross, Department of Economics.

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