Ruhr Economic Papers

Ruhr Economic Papers #94

Does Government Idelogy Matter in Monetary Poliy? - A Panel Data Analysis for OECD Countries

by Ansgar Belke and Niklas Potrafke

Universit├Ąt Duisburg-Essen, 03/2009, 37 S./p., 8 Euro, ISBN 978-3-86788-105-0

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Abstract

This paper examines the effect of government ideology on monetary policy in a quarterly data set of 15 OECD countries in the period 1980.1-2005.4. Our Taylor-rule specification focuses on the interactions of a new time-variant indicator for central bank independence and government ideology. The results suggest that leftist governments did not decrease short term nominal interest rates at all. In contrast, short term nominal interest rates were higher under leftist governments. A potential reason for this finding might be that leftist governments have sought to make a market-oriented policy shift by delegating monetary policy to conservative central bankers.

JEL-Classification: E52, E58, D72, C23

Keywords: Monetary policy; Taylor rule; government ideology; partisan politics; central bank independence; panel data

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