The politics of redistribution and price stability : party systems and economic policies in OECD

Abstract

Why have some countries been more successful than others in keeping price stability? This thesis answers this question by exploring the political determinants o f the policies of price stability on the basis o f the political cost they incur to the government It challenges the universality o f conventional approaches to the politics o f inflation such as the role of independent central banks or the role o f wage moderation. It argues that price stability cannot be understood without taking into account the political costs politicians face in different political and economic systems when deciding to deflate. Price stability is a public good that has to be financed by all the groups in the society. At the same time, it is a good with negative externalities; some groups benefit more than others (for example savers and financial intermediaries) while some other groups pay higher cost than others (lower income groups that face higher risks of getting unemployed). The political dilemma is resolved by compensating those who bear the highest cost, as long as they have the political voice. The political inclusiveness o f the political party system determines whether the interests o f the disaffected minority will be represented in the government and will be taken care of through higher social transfers. As a result, price stability is a function o f the party system and of the welfare state. The thesis provides empirical support from 18 OECD countries of the positive role o f social insurance on deflation. It also shows that proportional electoral systems and coalition governments redistribute more through higher social spending than less proportional systems and single party governments. As a consequence, more proportional political systems have enjoyed higher price stability and have been less subjected to monetary political business cycles than less proportional systems.