Who Creates Political Business Cycles? (Should Central Banks Be Blamed?)

Little attention has been paid in most economic studies on political business cycles to separate the effects of fiscal and monetary policy. We attempt to assess the effect of monetary policy in a panel model for 14 OECD countries. To answer the question of whether central banks actively create political business cycles we focus on the short-term interest rate as a proxy for the use of monetary instruments. Our results indicate that central banks should not be blamed for creating political business cycles as we do not find any evidence for cyclical behavior in the short-term interest rate. This conclusion holds no matter whether central banks are independent or not or are constrained by the exchange rate system in force.