Government Ideology, Monetary Policy, Fiscal Policy, and Financial Crises

Do the ideological preferences of governments affect macroeconomic variables? According to partisan theories, the political ideology of the median voter affects preferences of elected officials. The political ideology of the government may affect the economy through different policy channels, such as fiscal policy and monetary policy. If governments strive for political objectives rather than maximize long-term societal welfare then inefficiencies could arise at the macro level. In extreme cases, these inefficiencies may lead to macroeconomic and financial tensions that accumulate over time until a financial crisis is triggered (think about excessive and persistent budget deficits). The research conducted in this thesis revisits the link between government ideology and monetary policy, fiscal policy, and financial crises. Is the political ideology of the government a determinant of short-term interest rates? Does government ideology affect fiscal consolidations and expansions? Can government ideology be linked to the occurrence of financial crises? The results indicate that government ideology is a good predictor of financial crises. A potential channel for this to happen could be explained by the other 2 main findings of this thesis: government ideology may affect monetary policy and affects the occurrence and duration of fiscal adjustments and expansions. The analysis conducted in this thesis is extremely relevant in the context of the massive fiscal and monetary expansions that took place as a response to the macroeconomic effects of the COVID-19 pandemic and even more so in the context of the current -sluggish- monetary response to the recent rise in inflation