In three essays, my dissertation analyzes the political economy of macroeconomic policies and outcomes in democratic settings. Chapter 2 seeks to identify and document the micro-foundations of inflationary policy, with a focus on the role of economic inequality. Previous work on the politics of monetary policy has concentrated on the role of distributive motives stemming from individual characteristics such as income levels or factoral/sectoral interests in formation of monetary policy preferences of citizens. This work pays little attention to how a country's overall distributive context, namely its economic inequality level, affects their preferences vis-a-vis price stability and employment. My research argues that as inequality pushes more citizens below the average income of a society, they are more likely to demand redistribution through higher employment (and thus more competitive wages) and more fiscal spending, each of which can be better supported by expansionary monetary policy. In terms of inflation aversion, this means that inequality renders citizens more tolerant of inflation. Tests on 483,557 respondents from 33 countries (1976-2016) using the International Social Survey Program and the Eurobarometer demonstrates that inequality significantly moderates citizens' inflation aversion.Chapter 3 examines how central bank independence (CBI) as an institutionalized form of monetary technocracy, undermines elected governments' democratic accountability for economic outcomes. CBI implies that elected governments delegate monetary policy to technocrats in central banks. I argue that given the substantial influences of monetary policy through manipulation of interest rates on consumption, investments, exchange rates, capital flows and government spending, all of which critically determine the performance of the economy, CBI can blur the line of responsibility for economic performances between elected governments and central banks. It can thereby weaken voters' ability and willingness to electorally punish (or reward) governments on the basis of those outcomes. Utilizing data from the Comparative Study of Electoral Systems, I test how CBI conditions the effects of both voters' subjective evaluation of the economic outcomes and objective macroeconomic performances on voting for incumbents in 38 countries from 1996 to 2016. The result shows that CBI significantly attenuates the reward and punishment mechanism of elections based on economic records.Chapter 4, co-authored by Cristina Bodea and Christian Houle, investigates the impact of financial crises on income inequality. Important evidence has emerged that in the aftermath of crises, politics becomes polarized and economists have linked this to greater gaps in income due to crises. The evidence however on whether crises can be linked to divergent incomes is weak and plagued by 1) the possibility of a reverse effect going from great disparity in incomes to major economic crises; 2) the persistent nature of income inequality; and 3) important measurement error in both the dependent and independent variables. We use the longest time stretch of available data on crises and types of crises (Reinhart and Rogoff 2011) and income inequality (Solt 2009), as well as General Method of Moments and Error Correction Models to more credibly tackle the complex theoretical and empirical relationship between crises and inequality. We find strong evidence that currency, banking, inflation and debt crises increase inequality, particularly in the long run.
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