The interaction of central bank behavior with fiscal policymaking and the political business cycle : a multi-country study



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The dissertation examines the relationship between monetary and fiscal authorities in national policymaking. The primary hypothesis is that, while the institution of central banking internalizes longer-term incentives than those faced by the government, the perceived threat to central bank autonomy provides an indirect role for government pressure in affecting the trade-off weights applied in monetary policy. With the deficit proxying for this pressure, the response to the deficit then interacts with the policy response that would follow from the bank's unconstrained loss function — and in this way imputes the more expansionary stance that may be preferred by government. Strong empirical support for the hypothesized role of the deficit follows for the U.S. Results for Canada and France provide somewhat weaker support, but results for the U.K. and West Germany are inconsistent with the theory. The model therefore appears most fitted to the institutional setting of the U.S.



Monetary policy, Central Banks and banking