Societal Preferences, Partisan Agents, and Monetary Policy Outcomes

Abstract

If different producer groups have divergent interests concerning macroeconomic policies, how do societal preferences translate into state policy outcomes? I develop and test a party-as-agent framework for understanding the importance of societal preferences with regard to monetary policy under capital mobility. Following the principal-agent model, political parties function as agents for different societal principals. Rightist parties tend to represent internationally oriented business groups with preferences for monetary convergence, while leftist parties do the same for domestically oriented groups preferring monetary autonomy under capital mobility. I present statistical evidence showing that OECD leftist governments have been associated with more monetary autonomy and currency variability than their rightist counterparts, even after controlling for basic economic indicators such as inflation. The statistical evidence also shows that societal group size tends not to explain either autonomous monetary policy choices or exchange-rate stability. Thus even large and wealthy societal groups may be unable to obtain their preferred policy outcome when their respective partisan agents do not hold government power.I thank the editor of IO and two anonymous reviewers for their challenging comments and useful suggestions. I also thank Bill Bernhard, Eric Fisher, Tim Frye, Mark Hallerberg, Ed Mansfield, Pat McDonald, Layna Mosley, An bal P rez-Li n, and David Rowe for their comments and advice on the many earlier versions of this article. Finally, thanks are also due to Sawa Omori for her research assistance on this project. All errors remain my own responsibility.