Monetary Policy, Delegation and Polarisation

Abstract

This paper studies the relation between political polarisation and delegation of stabilisation policy. There is asymmetric information about how the economy works: unlike voters, two political parties know the variance of an employment shock. Prior to an election each party proposes a central banker to be chosen if the party wins. If political polarisation is small, voters will learn the true variance and the central banker and the stabilisation policy are the ones most preferred by the median voter. If the political polarisation is high, stabilisation policy does not reflect the variance but only the preferences of the winning party.

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