Politics and Monetary Policy

Michael Ehrmann; Marcel Fratzscher

doi:10.1162/rest_a_00113

Politics and Monetary Policy

Michael Ehrmann^1,2; Marcel Fratzscher^3,1,4

¹ European Central Bank · ² Bank of Canada · ³ German Institute for Economic Research · ⁴ Centre for Economic Policy Research

The Review of Economics and Statistics 2011 open access

How and why do politicians' preferences about monetary policy differ from the interest rates set by independent central banks? Looking at the European Central Bank (ECB), this paper shows that politicians, on average, favor significantly lower interest rates. Three factors explain the different preferences. First, politicians put relatively less weight on inflation (and more on output) in their preferred monetary policy reaction function. Second, their preferences are affected by political economy motives. Third, different preferences are also, and largely, due to different constituencies, as politicians primarily focus on national economic objectives rather than the euro area as a whole.

DOI: 10.1162/rest_a_00113
Volume: 93 (3)
Pages: 941-960
Language: en
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