Monetary institutions and the political survival of democratic leaders

Abstract

According to the political business cycle literature, survival-maximizing leaders will manipulate whatever macroeconomic policy instruments they have at their disposal in order to retain power. However, an obvious implication of the political business cycle literature has not previously been adequately tested: does having the ability to manipulate macroeconomic policy instruments actually allow leaders to stay in office longer? We argue that elected leaders who have neither fiscal nor monetary instruments available for electoral purposes will find it more difficult to survive in office. We test this claim using data from 19 OECD countries in the latter part of the twentieth century when the degree of capital mobility in the international economy was high. We find that access to macroeconomic instruments does help leaders retain office, but that these instruments are only effective for leaders who have been in office for at least 7years. © 2012 International Studies Association.