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Finding political capital for monetary tightening: Unemployment insurance and partisan monetary cycles
Author(s) -
ALEXIADOU DESPINA
Publication year - 2012
Publication title -
european journal of political research
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 3.267
H-Index - 95
eISSN - 1475-6765
pISSN - 0304-4130
DOI - 10.1111/j.1475-6765.2012.02053.x
Subject(s) - economics , unemployment , monetary policy , inflation (cosmology) , incentive , social insurance , monetary economics , politics , empirical evidence , capital (architecture) , democracy , labour economics , macroeconomics , market economy , political science , history , philosophy , physics , archaeology , epistemology , theoretical physics , law
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.