Abstract

AbstractDuring the past decades, central bank independence has been increased in a large number of countries. However, even an independent central bank does not operate in a political vacuum. For instance, governments generally appoint political allies, presuming that consequently the central bank will follow policies that are in line with the governments’ preferences. The first part of this paper reviews recent research on whether the political ideology of the government has any impact on monetary policies pursued. It is argued that if forward-looking data are used to estimate Taylor-rule models for a panel of OECD countries that take country heterogeneity into account, there is no strong evidence for partisan effects on monetary policy. One of the reasons that central bank independence is no longer taken for granted is the acclaimed redistributive effects of monetary policy. The second part of the paper reviews recent research on the impact of conventional and unconventional monetary policy on income and wealth inequality. It is concluded that empirical research provides very mixed evidence on these issues and that it is not well connected to recent theoretical work.

Highlights

  • During the past two decades, central bank independence (CBI) has been increased in a large number of countries

  • The evidence reported by the authors provide support for traditional partisan effects conditional on CBI: short-term interest rates are lower during a left-wing government when the central bank is not independent

  • We examine the influence of governments’ ideology on the actions of central banks conditional on the level of central bank independence

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Summary

Introduction

During the past two decades, central bank independence (CBI) has been increased in a large number of countries. In advanced countries, and in emerging and developing economies central banks have been granted. Central bank independence means that monetary policy is delegated to unelected officials and that the government’s influence on monetary policy is restricted. Even if a central bank is independent, the central bank does not operate in a political vacuum. When it comes to appointments, politics matters.

Caruana
Partisan influence on monetary policy4
Impact of central bank policies on inequality7
Findings
Conclusions
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