The Politics of Monetary Policy

Abstract

In this paper we critically review the literature on the political economy of monetary policy emphasizing the questions opened by the recent …nancial crisis. We begin with a discussion of the issue of rules versus discretion. We then examine the independence of Central banks both in normal times and in crisis and in relation to the political cycles. Finally we address international institutional issues concerning the feasibility, optimality and political sustainabilty of currency unions in which more than one country share the same currency. A brief review of the Euro experience concludes the paper.

Congress and the Federal Reserve

“…This suggests that the Fed is (or was) engaged in a high‐frequency political battle and occasionally resorts to adjusting monetary policy to reduce support for a bill under consideration. This is consistent with our reading of the FOMC transcripts (see Appendix) and with the view of Lohman () and Alesina and Stella ().…”

“…Several authors suggest that Congressional oversight is generally lax (Kettl ), that the Fed successfully obfuscates (Pierce ), and that the Fed has an implicit bargain with Congress whereby the Fed takes the blame for poor economic performance in exchange for autonomy (Kane ). But others argue that when the electoral cost of a bad economy is particularly high, the Fed must accommodate Congressional pressure to preserve its prerogatives (Willet , Lohman , Alesina and Stella ).…”

From Hero to Zero? The Role of the Euro in the Current Crisis: Theory and some Empirical Evidence

“…4 3 Unlike Alesina and Stella (2010), the present model allows the a and k parameters to differ across the N countries. This generates a more realistic source of costs and benefits from joining in a monetary union (see below).…”

“…2 Alesina and Stella's (2010) model follows the contributions of Kydland and Prescott (1977) and Barro and Gordon (1983). Alternatively, the theory can be developed in terms of the New Keynesian model of Clarida et al (1999), as in Karras (2003).…”

The Politics of Central Bank Independence

“…Seminal references are Kydland and Prescott (1977), Barro and Gordon (1983) and Rogoff (1985). 3 Alesina and Stella (2010) provide an excellent review of the models used in these papers.…”