A model of partisan central banks and opportunistic political business cycles

Abstract

This paper presents a model which analyses the impact of central bank independence, central bank partisanship and politicians' competence on the business cycle. Although the central bank is independent, partisan central bankers initiate cycles and influence election outcomes. In the signaling game, a central bank chooses the monetary growth rate and may derive additional utility, if an ideologically preferred government is (re-)elected. Party preferences are private information to the central bank.