Abstract
This article analyses the relationships between inequality, political pressure, populism and central bank independence (CBI). If there is financial inequality across citizens, monetary policies yield distributional consequences. Political pressure on central bank will increase. A populist wave fuelled by large demand for redistribution with no regard to long term consequences may undermine actual CBI.
This is a preview of subscription content, log in via an institution to check access.
Similar content being viewed by others
Notes
Alternatively, as in Gertler et al. (2017), we can assume that each household (family) consists of a continuum of members who can be either workers or bankers. Workers supply labour and earn wages for the household, while bankers manage a financially risky business and transfer the relative earnings back to the household. The number of bankers in each household is heterogeneous.
Note that consumption utility is linear in consumption and the latter is linear in income. An alternative specification, in which utility is concave in consumption and/or the latter is concave in income, would not change our results regarding the redistributive effects. At the cost of increased complexity, such an alternative specification would uncover an additional distortionary channel: more generous bailouts - higher taxation - would have stronger impact on utility because, due to concavity, consumption -and utility - would decrease by a larger amount at the margin. Finally note that, despite our assumption that consumption utility is linear in income, individual’s optimization problem is concave because U(l) in (4) is convex.
The relationship between voting and financial wealth distribution has been explored in Masciandaro and Passarelli (2013) in analysing the policy dilemma between financial regulation and taxation.
References
Acemoglu D, Erogov G, Sonin K (2013) A political theory of populism. Q J Econ 128(2):771–805
Aggeborn L. and Persson L., (2017), Public Finance and Right-Wing Populism, Research Institute of Industrial Economics, IFN Working Paper Series, n.1182
Agur I (2018) Populism and central Bank Independence: comment. Open Econ Rev 29:687–693
Algan Y., Guriev S., Papaioannou E. and Passari E., (2017), The European Trust Crisis and the Rise of Populism, CEPR discussion paper, n. 12444
Amaral P., (2017), Monetary Policy and Inequality, Economic Commentary, Federal Reserve of Cleveland, January, n.1
Ampudia M., Georgarakos D., Slacalek J., Tristani O., Vermeulen P., Violante G.L, (2018), Monetary Policy and Household Inequality, ECB working paper series, n. 2170
Auclert A (2019) Monetary policy and the Redistribution Channel. Am Econ Rev 109(6):2333–2367
Ball E., Howat J. and Stansbury A., (2016), Central Bank Independence Revised, mimeo
Binder CC (2018) Inequality and the inflation tax. Haverford College, Department of Economics, mimeo
Binder C.C. (2018b), Political Pressure on Central Banks, Haverford College, Department of Economics, mimeo
Bodea C, Garriga AC, Higashijima M (2017) Economic institutions and autocratic breakdown: monetary constraints and fiscal spending in dominant-party regime. J Polit 2019
Brunnermeier M.K., and Sannikov Y. (2013), Redistributive Monetary Policy, Jackson hole symposium, September 1st, 2012, the changing policy landscape, Federal Reserve Bank of Kansas City, pp. 331–384
Buiter W.H., (2014), Central Banks: Powerful, Political and Unaccountable, CEPR Discussion Paper Series, n. 10223
Bunn P., Pugh A. and Yeates C. (2018), The distributional impact of monetary policy easing in the UK between 2008 and 2014, Bank of England, Staff Working Papers, n.720
Cairò I, Sim J (2018) Income Inequality, Financial Crises, and Monetary Policy, Federal Reserve Board. Finance and Economics Discussion Series:48
Casiraghi M., Gaiotti E., Rodano L. and Secchi A. (2016), A “Reverse Robin Hood”? The Distributional Implications of Non-Standard Monetary Policy for Italian Households, Bank of Italy, Working Paper Series, June, n. 1077
Cavallo M, Del Negro M, Frame WS, Grasing J, Malin BA, Rosa C (2017) Fiscal Implications of the Federal Reserve’s Balance Sheet Normalization, finance and economics discussion series. Federal Reserve Board, Washington, D.C.
Chersterley N. and Roberti P. (2016) Populism and Institutional Capture, Department of Economics, University of Bologna, working paper series, October, n. 1086
Dornbush R. and Edwards S., (1991), The Macroeconomics of Populism in Latin America, University of Chicago Press, Chicago
Dolado J.J., Motyovszki G. and Pappa E. (2018) Monetary policy and inequality under labor market frictions and capital-skill complementarity, IZA Discussion Paper Series, n. 11494
Dovis A. Golosov M. and Shourideh A., (2016) Political Economy of Sovereign Debt: A Theory of Cycles of Populism and Austerity, NBER Working Paper Series, n. 21948
Fischer S (2015) Central Bank Independence, Herbert stein memorial lecture, National Economists Club, Washington, D.C
Fujiwara I., Hori S. and Waki, Y (2019) Generational war on inflation: optimal inflation rates for the young and the old, RIETI discussion paper series, 19-E-021
Furceri D, Loungani P, Zdzienicka A (2018) The effects of monetary shocks on inequality. J Int Money Financ 85(C):168–186
Gahvari F, Micheletto L (2019) Heteregeneity, monetary policy, Mirrleesian taxes, and the Friedman rule. Economic Theory 67:983–1018
Gertler M., Kiyotaki N. and Prestipino A., (2017) A Macroeconomic Model with Financial Panics, International Finance Discussion Paper Series, Board of Governors of the Federal Reserve System, December, n. 1219
Goodhart CA, Lastra R (2018) Populism and central Bank Independence, Open Economies Review. February 29(1):49–68
Guiso L., Herrera H., Morelli M. and Sonno T. (2017) Demand and Supply of Populism, mimeo
Guzzo V, Velasco A (1999) The case for a populist central banker. Eur Econ Rev 43:1317–1344
de Haan J, Bodea C, Hicks R, Ejiffinger S (2018) Central Bank Independence before and after the crisis. Comp Econ Stud:1–20 forth
Inglehart R.F. and Norris P. (2016) Trump, Brexit and the Rise of Populism: Economic Have- Nots and Cultural Backlash, Harvard Kennedy school, research working paper series, n. 26
Issing O (2018) Central Bank Independence – will it survive? In: Eijffinger S, Masciandaro D (eds) Hawks and doves: deeds and words. CEPR, London
Kaltwasser C (2018) Studying the (economic) consequences of populism, American Economic Association, Papers and Proceedings. May 108:204–207
Kaplan G, Violante GL (2018) Microeconomic heterogeneity and macroeconomic shocks. J Econ Perspect 32(3):167–194
Lippi F (2002) Revisiting the case for a populist central banker. Eur Econ Rev 46:601–612
Masciandaro D, Passarelli F (2013) Financial systemic risk: taxation or regulation? J Bank Financ 37(2):587–596
Masciandaro D. and Romelli D. (2018) Peaks and Troughs: Economics and Political Economy of Central Bank Independence Cycles, in D. Mayes, P.L. Siklos and J.E, Sturm (eds.), Oxford Handbook of the Economics of Central Banking, Oxford University Press, New York, forthcomings
Meltzer AH, Richard SF (1981) A rational theory of the size of government. J Polit Econ 89(5):914–927
Oikawa K. and Ueda K. (2018) Reallocation Effects of Monetary Policy, RIETI discussion paper series, 18-E-056
Rajan R., (2017) Central Banks’ Year of Reckoning, project syndicate, December 21st, mimeo
Rodrik D. (2018) In Defence of Economic Populism, Project Syndicate, January, 8th
Rogoff K.S. (2019) How Central Bank Independence Dies, Project Syndicate, May 31st, mimeo
Sachs JD (1989) Social conflict and populist policies in Latin America. NBER Working Paper Series:2897
Saint Paul G., (2018) From Microeconomic Favoritism to Macroeconomic Populism, CEPR Discussion Paper Series, n. 13434
Samarina A. and Nguyen A., (2019) Does monetary policy affect income inequality in the euro area, DNB working paper series, n. 626
Sargent TJ, Wallace N (1981) Some unpleasant monetarist arithmetic, Federal Reserve Bank of Minneapolis, Quarterly Review. Fall 1-17
Smets F (2013) Financial stability and monetary policy: how closely interlinked? Sveriges Riksbank, Economic Review, Special Issue 3:121–159
Stiglitz J.E., (2013) A revolution in monetary policy: lessons in the wake of the global financial crisis, The 15th C.D. Deshmukh Memorial Lecture, Mumbai, January 3rd
Thiele A (2018) The Independence of the ECB: justification, limitations and possible threats. Journal of Self Governance and Management Economics 6(1):98–121
Turdaliev N (2018) Heterogeneity and monetary policy. J Econ:1–27. https://doi.org/10.1007/s00712-018-0649-6
Acknowledgments
We are particularly grateful to the editor, George Tavlas, and two anonymous referees for their very constructive comments and useful insights on earlier drafts. The usual disclaimer has to be applied. The authors thank the BAFFI Carefin Centre at Bocconi University for financial support.
Author information
Authors and Affiliations
Corresponding author
Additional information
Publisher’s Note
Springer Nature remains neutral with regard to jurisdictional claims in published maps and institutional affiliations.
Rights and permissions
About this article
Cite this article
Masciandaro, D., Passarelli, F. Populism, Political Pressure and Central Bank (in)Dependence. Open Econ Rev 31, 691–705 (2020). https://doi.org/10.1007/s11079-019-09550-w
Published:
Issue Date:
DOI: https://doi.org/10.1007/s11079-019-09550-w