Political Economy of the Swiss National Bank

From a public-choice perspective, there are two myths on central banking. (Havrilesky 1988) The first myth is that monetary (and fiscal) policy systematically attempt(s) to maximize social welfare. The second myth is that a central bank is an independent, politically neutral institution.

How does the Swiss National Bank (SNB) react to the state of the economy? There exists almost no quantitative evidence on this question. Moreover, the little existing empirical work provides conflicting results. This chapter presents some further evidence on SNB behavior. For this purpose a standard linear reaction function relating the change in the monetary base and in the money supply M1 to a set of economic stabilization goals is estimated. Since central banks are generally expected to respond to inflation, growth, unemployment, exchange rates and interest rates, variables representing these basic economic pressures are employed as regressors.

Direct political influence on monetary policy is analyzed in the framework of elections, parties and administrations. Indirect political influence is investigated by testing for effects of fiscal policy on monetary policy. (Laney/Willett 1983 54; Alesina/Sachs 1988 67 Fn. 6; Lang/Welzel 1992 73) The impact of fiscal policy on monetary policy is frequently studied in the context of a budget deficit (or surplus) money supply relationship. The basic argument is that fiscal policy controls macroeconomic variables, for instance the deficit, that influence monetary policy. The way the central bank reacts to these variables is interpreted as evidence on the (in)dependence debate.

Indirect political influence on monetary policy is investigated by testing for effects of fiscal policy on monetary policy. Direct political influence is analyzed in the framework of elections, parties and administrations. This chapter addresses the question whether elections have any effect on Swiss monetary policy. While this question has been analyzed for most major central banks, an explicit and systematic test for the SNB is still missing.¹ This chapter intends to fill that gap.

A central bank is usually thought — and conceives of itself as — „a nonpartisan technocratic group making nonpartisan technical decisions.“(Beck 1987 199) But monetary policy is not made in a policy vacuum. And economic literature on central banking typically assumes some sort of direct and/or indirect political influence. (Havrilesky 1988 84)¹

While executive influence on central banks is widely recognized, the legislature is usually not considered to be important in monetary policy, despite the fact that the central bank is a creation of the legislature and ultimately is accountable to it. The conventional wisdom is that legislators lack incentives to monitor and influence monetary policy. The view that government agencies operate independently of the legislature has been challenged by the theory of legislative control developed by Weingast. (Weingast/Moran 1983) Building on principal-agent models the theory of legislative control argues that principals are able to control their agents effectively. More recently, this theory has also been applied to the Federal Reserve. Grier (1991) and Havrilesky (1992) both report evidence for legislative influence by specialized legislative committees of the US legislature (the US Senate Banking Committee) on US monetary policy. But Beck (1990), who reworks an earlier version of Grier’s analysis, finds that data that cover a slightly different time period reject Grier’s results. The question of congressional influence on US monetary policy remains the subject of continuing debate.