Does Government Ideology Matter in Monetary Policy? A Panel Data Analysis for OECD Countries, Paper presented at the Annual Meeting of the European Public Choice Society (EPCS

Draft – Please do not quote This paper examines the effect of government ideology on monetary policy in a quarterly data set of 15 OECD countries in the period 1980.1-2005.4. The partisan approach predicts that leftist governments implement expansionary monetary polices and thus decrease the central bank interest rate. We argue, however, that ideology-induced policy will only matter, if at all, when central bank dependence is high and the effect of an exchange rate target is taken into account. Our Taylor-rule specification accordingly focuses on the interactions of new indicators for government ideology, de facto exchange rates and central bank independence. The results are sensitive to the inclusion of the lagged short term nominal interest rate in the empirical model: Without lagged dependent variable the results suggest that leftist governments even increased short term interest rates. In contrast, this effect disappears when the lagged dependent variable is included