The Monetary Policy Preferences of Left- and Right-Wing Populism

Abstract

The paper uses a Taylor-rule model for central banks to examine the economic outcome of modern populism. Annual data of major OECD countries from 2001 to 2019 is applied to examine the overall level of populism in the regime, the left/right divide of the regime and the populist political force, the independence of the central bank from the political regime to model the target interest rate. The results verify the impact of populism on monetary policy and the invalidity of the traditional partisan approach, and distinguish the different effect of left- and right-wing populism. A populist regime favors low interest rate than a non-populist regime, and a leftist populist regime prefers expansionary monetary policies than rightist populist regime. Such a divide in monetary policy preference can be used as a classification criterion for classification of populist political forces, with The Five Star Movement in Italy as an example.