Macroeconomics and Politics Revisited: Do central banks Matter?

Abstract

This paper provides a model encompassing both partisan in¯uences on monetary policy and the issue of central bank independence. In a regime of partial independence, central bank's policy responses are not immune from partisan in¯uences. Still, the latter fail to aect systematically the expected output level in election years. The predictions of the model are consistent with the empirical literature on partisan cycles and account for some of its controversial ®ndings.

Why separate monetary policy from banking supervision?

“…1 Alternatively, the design of monetary policy may be viewed in light of the rational partisan theory studies starting with Hibbs (1977) and Alesina (1987Alesina ( , 1988. In this line of research, which was extended by Grilli et al (1991), Lohmann (1998) and Lossani et al (2000), among others, 2 parties in office decide on an organization of monetary policy that allows them to easily tamper with the conduct of monetary policy.…”