Which Type of Central Bank Smooths the Political Business Cycle?

This paper develops a dynamic model of Rational Partisan Business Cycles, wherein wage contracts overlap elections and wage setters have to make a prediction about the election result. Uncertainty leads to preand post-election date output fluctuations. Election result probabilities are imputed and then used to construct variables in electoral uncertainty. Using data from 20 OECD countries over the period 1960-1998 left wing incumbents are found to increase output, but the increased expectation of a left wing regime reduces it. These political effects are found to be offset by Central Bank Independence and in particular, objective independence.