Ruhr Economic Papers
Ruhr Economic Papers #286
Political Business Cycles and Monetary Policy Revisited – An Application of a Two-Dimensional Asymmetric Taylor Reaction Function
by Jens Klose
University of Duisburg-Essen, 10/2011, 35 S./p., 8 Euro, ISBN 978-3-86788-332-0download
This paper uses two-dimensional asymmetric Taylor reaction functions for 16 OECD-countries to account for different reactions to the inflation rate and output by central banks before or after an election of the fiscal authorities in the respective country. Important for such an investigation is not only the period before or after an election takes place but also whether the inflation rate and output are below or above their target or potential value because this information shows whether the central bank systematically deviates from the Taylor rule. Using a Panel-GMM we observe that in the OECD-countries there are political business cycles in monetary policy with respect to the inflation and output response. However, the supporting time horizon differs between both exogenous indicators and state of variables.
JEL-Classification: E32, E43, E52, E58
Keywords: Political business cycle; monetary policy; Taylor rule; asymmetries; Panel- GMM