Institutional checks and balances and the political control of the money supply |
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Authors: | Lohmann Susanne |
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Institution: | Department of Political Science, University of California Los Angeles, CA 900951472, USA |
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Abstract: | The Nordhaus hypothesis about the political business cycle assertsthat elected politicians have incentives to expand the moneysupply prior to elections to stimulate the economy and therebyengineer their re-election. Central bank independence is widelyregarded as an institutional solution to this problem. However,this solution works only if central bankers are not perfectagents of their political principals, perhaps because they areconservative (more inflation-averse). This artide proposes analternative solution: political business cycles may be obstructedby institutional checks and balances. The analysis applies tothe Deutsche Bundesbank and has implications for the institutionalstructure of the future European Central Bank. |
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