Does easy money win elections? Study finds no evidence

No measurable electoral gains

In their discussion paper “Does Easy Money Win Elections?”, the researchers estimate the effect of interest rate changes on the vote share of incumbent governments. A simple comparison of interest rates and election results would be misleading. Central banks tend to cut rates when the economy is weak, and a weak economy costs governments votes anyway. Governments that expect to lose may also push hardest for lower rates. The researchers therefore look at countries that tied their currency to that of another country and allowed money to flow freely across borders. These countries had to follow that country’s interest rate, so their rates moved with economic conditions abroad rather than at home. Just like political pressure, these changes pushed interest rates away from the level the central bank would have chosen itself.

The results show that a typical interest rate cut (0.91 percentage points over a legislative term) is estimated to produce no change in the incumbent government’s vote share. The researchers can rule out large electoral gains. A modest effect remains possible, but it would only matter in very close elections.

The findings remain consistent across a range of alternative analyses. Chen, Van Genderen and Ward examine whether voters respond primarily to monetary policy in the final year before an election, whether the effects differ when the economy is weak or when inflation is high, and whether interest rate rises have different consequences from cuts. None of these analyses provides evidence that easier monetary policy delivers electoral gains.

Potentially decisive only in closely contested elections

The researchers also examine whether interest rate cuts could have prevented incumbent governments from losing elections. During the period studied, incumbent governments lost their parliamentary majority or the presidency on 104 occasions. Based on the central estimate, a typical interest rate cut would have prevented none of these defeats. At the upper one-sided 95 per cent confidence bound for the estimated effect, however, 15 defeats might have been prevented. All involved closely contested elections.

Implications for central bank independence

Governments that pressure central banks to lower interest rates assume this will pay off at the ballot box. This study does not support that assumption. The costs of such pressure, on the other hand, are well documented. Previous research shows that political pressure on central banks raises inflation and inflation expectations without increasing output. Pressuring the central bank comes with clear economic costs, while the electoral benefits appear limited.

The authors therefore conclude that the election results of the past century provide no evidence that 'easy money' keeps governments in power. The most likely electoral gain from cutting interest rates is close to zero, and a large gain can be ruled out. At most, a modest effect could tip an exceptionally close election.