Do conservative governments make a difference in monetary policy? A study of the U.S. and the U.K.

Abstract

This paper offers an empirical test of the Simon's proposition: Do conservative governments make a difference in monetary policy? Using quarterly data on the inflation rate and the GDP gap, the authors test the hypothesis during the tenure of two regimes: conservatives and non-conservatives, and for two countries, the U.S. and the U.K. Under the assumption that the monetary authority followed a Taylor rule, they evaluate monetary policies pursued by alternative regimes in the two countries. Alternatively, they assume that the monetary authority adjusts money growth in response to deviations of inflation and GDP from their target levels. The estimation results were mixed. The Simon's hypothesis was supported in the U.K. during the Thatcher regime, but not in the U.S. during the Reagan's tenure. The findings for the U.S. in contrast to those obtained for the U.K. indirectly validate the Simon's contention that monetary policy in the U.S. is subject to manipulation by interest groups

“Perhaps the ultimate test of the conservative status of government is its willingness to pursue stable monetary policy.”

William E. Simon, 1980, p. 8