Partisanship in the Setting and Coordination of Fiscal and Monetary Policies

Abstract: The principal concerns of this paper are with the roles partisan politics have played in the making of fiscal and monetary policies within the OECD countries as well as the extent to which these policies have complemented each other. It is argued that parties of the left pursue fiscal policies that are distinctly different from those pursued by the right. The critical difference is in the way these parties use fiscal policy as a corrective mechanism for dealing with macroeconomic problems: leftist parties adopt counter-cyclical fiscal policies while right-wing parties adhere to pro-cyclical fiscal stances. The paper also examines two arguments regarding monetary policy and how partisan politics influences affect this policy area. The first and most conventional argument sees the formal independence of the central bank from government as a means of negating partisan influences on monetary policy; the second advances the proposition that, regardless of central bank independence, monetary authorities are not politically neutral but instead share views similar to those of parties on the right-hand side of the political spectrum. Empirical analyses, using a pooled cross-section time-series design with data from 14 countries extending from 1961 through 1994, produces evidence in favor of the argument laid out on the role of partisanship in fiscal policy; it also shows little support for the view that central bank independence inhibits partisan influences while at the same time provides support for the thesis that central banks are politically non-neutral. Thus, coordination between fiscal and monetary policies is far less likely to occur when left-wing parties are in power