This paper provides a political-economy explanation for the separation of monetary policy from banking supervision by examining whether this institutional arrangement serves the platforms of the Conservative or of the Liberal parties, which are assumed to favor a stable price level and non-stable prices respectively. This paper shows this institutional design best serves the objectives of the Conservative party, provided the probability of banking crises is low. Thus this paper explains why European Monetary Union member states, which have led low-inflation policies since the mid-1980s, retained national Banking Authorities to supervise their banking systems when they created the European Central Bank. Journal of Comparative Economics 36 (3) (2008) 388-411.
Bibliographical noteFunding Information:
We thank Shaul Almakias, Leif Danziger, Allan Drazen, André Fourçans, Arye Hillman, David M. Levy, Abraham Lioui, Michael Makowsky, Shmuel Nitzan, Martin Paldam, Ilia Rainer, Hillel Rappaport, Assaf Razin, Avichai Snir, Samia Tavares, Yariv Welzman as well as participants at the European Public Choice Society conference, at the Tel Aviv macroeconomics workshop and at the Bar Ilan economics workshop for helpful comments on prior drafts of this paper entitled “Political business cycles under separation of monetary policy from banking supervision”. We also received helpful comments from two anonymous referees. Part of this paper was written while Franck was staying at the Center for the Study of Public Choice at George Mason University whom he thanks for its hospitality. Both authors gratefully acknowledge financial support from the Adar Foundation of the Economics Department of Bar-Ilan University. The usual disclaimer applies.
- Banking regulation
- Central banking
- Conservative policymaker
- Liberal policymaker