Finding political capital for monetary tightening: unemployment insurance and monetary cycles

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Abstract

How do governments find the political capital to raise interest rates in pursuit of inflation stabilisation? Against common wisdom, this article shows that the ability of governments to exercise tight monetary policy largely depends on the level of unemployment insurance. Unemployment insurance is particularly useful to social democratic parties since their core constituency – labour – is the hardest hit by economic downturns. Empirical evidence from 17 OECD countries over thirty years demonstrates that high levels of unemployment insurance present a strong incentive for social democratic governments to respond more aggressively to positive changes in inflation. These findings resolve the puzzle of why partisan monetary cycles are not often observed in the literature and have important policy implications, given continued calls for scaling down social insurance.
Original languageEnglish
Pages (from-to)809-836
Number of pages28
JournalEuropean Journal of Political Research
Volume51
Issue number6
DOIs
Publication statusPublished - 31 Oct 2012

Keywords

  • political capital
  • unemployment
  • monetary cycles

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