Political Business Cycles and Monetary Policy Revisited An Application of a Two-Dimensional Asymmetric Taylor Reaction Function #286

This paper uses two-dimensional asymmetric Taylor reaction functions for 16 OECDcountries to account for diff erent reactions to the infl ation rate and output by central banks before or after an election of the fi scal authorities in the respective country. Important for such an investigation is not only the period before or after an election takes place but also whether the infl ation rate and output are below or above their target or potential value because this information shows whether the central bank systematically deviates from the Taylor rule. Using a Panel-GMM we observe that in the OECD-countries there are political business cycles in monetary policy with respect to the infl ation and output response. However, the supporting time horizon diff ers between both exogenous indicators and state of variables. JEL Classifi cation: E32, E43, E52, E58