Political Monetary Cycles and a New de facto Ranking of Central Bank Independence

Alpanda, Sami and Honig, Adam (2007): Political Monetary Cycles and a New de facto Ranking of Central Bank Independence.

Abstract

This paper examines the extent to which monetary policy is manipulated for political purposes by testing for the presence of political monetary cycles between 1972 and 2001. This is the first study of its kind to include not only advanced countries but also a large sample of developing nations where these cycles are more likely to exist. We estimate panel regressions of a monetary policy indicator on an election dummy and control variables. We do not find evidence of political monetary cycles in advanced countries but find strong evidence in developing nations. Based on our results, we construct a new de facto ranking of central bank independence derived from the extent to which monetary policy varies with the election cycle. Our ranking of CBI is therefore based on the behavior of central banks during election cycles when their independence is likely to be challenged or their lack of independence is likely to be revealed. The ranking also avoids well-known problems with existing measures of central bank independence.

• Item Type: MPRA Paper
• Language: English
• Keywords: Political monetary cycles; central bank independence
• Subjects: E - Macroeconomics and Monetary Economics > E5 - Monetary Policy, Central Banking, and the Supply of Money and Credit > E58 - Central Banks and Their Policies; E - Macroeconomics and Monetary Economics > E5 - Monetary Policy, Central Banking, and the Supply of Money and Credit > E52 - Monetary Policy

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