Author Question: Research by Alberto Alesina has documented differences and similarities in the average annual rates ... (Read 61 times)

luvbio · **on:** Jun 30, 2018

Research by Alberto Alesina has documented differences and similarities in the average annual rates of growth in output during each year of Democratic and Republican administrations. Briefly explain what the pattern of these differences and similarities is.

What will be an ideal response?

Question 2

Suppose a government implements rules that result in a more independent central bank. What effect do you think this more independent central bank will eventually have on money growth and inflation in that country? Explain.

What will be an ideal response?

Christopher · **Reply #1 on:** Jun 30, 2018

Answer to Question 1

The growth rates are similar in the first year. While there are some differences in years 3 and 4, the differences are small. Where there are sizable differences in growth rates is in year 2. Here, we observe that GDP growth is about two times greater during Democratic administrations. The reason for this is that Democratic administrations presumably prefer more expansionary policies and that the effects of these policies kick in with a lag.

Answer to Question 2

Research suggests as central bank independence increases, average inflation rates decrease (which implies that money growth must be lower as well). The possible explanation for this deals with political manipulation of monetary policy. We would expect to see at some point both slower money growth and lower inflation.