Real interest rates tend to be higher when the central bank chief and the head of government have a different political orientation
Using panel data regression methods, this paper studies the effects of a difference in political affiliation between the chief central banker and head of government on real central bank policy rates and the economy. Such a difference in political affiliation appears to lead to an increase in real central bank policy rates, an increase in employment and tighter fiscal policy. This finding may have implications for future study of the effects of monetary policy tightening on the economy. It also implies that central bank chiefs may not be apolitical and consequently giving central banks more independence may not be sufficient to make monetary policy apolitical.
Faculteit der Managementwetenschappen