Political monetary cycles: An empirical study

Abstract

After decades of research, discussions related to the link between political events and monetary policy have been ongoing. The purpose of this study is to examine whether electorally induced cycles in monetary policy exist. To achieve this, a unique panel dataset comprising 110 countries over 32 periods (1985–2016) was constructed, incorporating election periods and political regimes. This study provides evidence that elections influence monetary policy in developed and developing countries. Specifically, the study reveals that the growth of monetary mass (measured as the growth rate of M1) is significantly higher during pre-electoral periods. On average, the growth of monetary mass is between 1.1% and 2% higher during the 12 months prior to a national election. Furthermore, the study conducts an extensive analysis on the type of institutional frameworks that may mitigate these political monetary cycles. it suggest that free and fair elections, left-wing incumbents and the seniority of central banks contributes to reducing the magnitude these political monetary cycles.