EPCI (Economie politique du changement institutionnel) Seminar

Du 09/02/2024 de 11:00 à 12:30

MSE, salle 116

GRITTERSOVA Jana (PSE)

The Great Recession and the Bank of England's Monetary Policy: The Political Ramifications of Ultra-Low Interest Rates

How and why do politicians' monetary policy preferences differ from that of autonomous central banks? When and why do politicians support and criticize central banks? This paper examines the extent to which the weights on inflation and employment in the preferred monetary policy reaction functions differ between the Bank of England and British politicians in the aftermath of the 2008 global financial crisis. I construct a novel database containing politicians' statements about the Bank of England's monetary policy from 2007 to 2017. These are statements extracted from newspaper articles and newswire reports regarding the Bank of England's monetary policy (interest rates and quantitative easing) made by government officials (prime minister and all ministers and Members of Parliament). The paper yields two main findings. First, in contrast to the existing literature, I find that British politicians give more importance to price stability (i.e., call for higher interest rates) and place a lower weight on unemployment in times of crisis. This result may seem less surprising in light of the political and distributional consequences of unconventional monetary policies implemented by central banks as emergency measures after the 2008 global financial crash. Asset price appreciation and rising wealth inequality amid wage stagnation, partly from unorthodox monetary policies of ultra-low interest rates, fueled public discontent and the populist surge across democratic societies. Right-wing populist leaders, drawing on public skepticism toward experts, technocrats, and elites, have emerged as the most outspoken critics of central banks. I argue that established political parties facing dissatisfied voters experiencing economic hardship also shifted their attention from traditional left-right issues to the distributional consequences of exceptional monetary policies as a self-preservation strategy. Second, I also find that the relative weight of inflation performance in politicians' preferred reaction functions decreases in favor of lower interest rates when their re-election chances are high, when a left party is in power, when the public trust in the BoE is low, and when the British pound appreciates.