Inflation and Unemployment Rates as Indicators of the Transition European Union Countries Monetary Policy Orientation

Numerous studies carried out in the developed 
western democratic countries have shown that the ideological 
framework of the governing party has a significant influence on the 
monetary policy. The executive authority consisting of a left-wing 
party gives a higher weight to unemployment suppression and central 
bank implements a more expansionary monetary policy. On the other 
hand, right-wing governing party considers the monetary stability to 
be more important than unemployment suppression and in such a 
political framework the main macroeconomic objective becomes the 
inflation rate reduction. The political framework conditions in the 
transition countries which are new European Union (EU) members 
are still highly specific in relation to the other EU member countries. 
In the focus of this paper is the question whether the same 
monetary policy principles are valid in these transitional countries as 
well as they apply in developed western democratic EU member 
countries. The data base consists of inflation rate and unemployment 
rate for 11 transitional EU member countries covering the period 
from 2001 to 2012. The essential information for each of these 11 
countries and for each year of the observed period is right or left 
political orientation of the ruling party. 
In this paper we use t-statistics to test our hypothesis that there are 
differences in inflation and unemployment between right and left 
political orientation of the governing party. To explore the influence 
of different countries, through years and different political 
orientations descriptive statistics is used. Inflation and unemployment 
should be strongly negatively correlated through time, which is tested 
using Pearson correlation coefficient. 
Regarding the fact whether the governing authority is consisted 
from left or right politically oriented parties, monetary authorities 
will adjust its policy setting the higher priority on lower inflation or 
unemployment reduction. 

• Elza Jurun
• Damir Piplica
• Tea Poklepović

• Inflation rate
• monetary policy orientation
• transition EU countries
• unemployment rate.

[1] D. A. Hibbs, "Political Parties and Macroeconomic Policy”, The American Political Science Review, 71(4), pp. 1467-1487, 1977.
[2] D. A. Hibbs, "The American Political Economy: Macroeconomics and Electoral Politics in the United States”, Harvard University Press, Cambridge, MA., 1987.
[3] P. Minford, "Interest Rates and Bond Financed Deficits in a Ricardian Two-Party Democracy”, Weltwirtschaftliches Archiv 124 (3), 1988.
[4] A. Alesina, "Macroeconomic Policy in a Two-Party System as a Repeated Game”, Quarterly Journal of Economics, 102(3), pp. 641-678, 1987.
[5] A. Alesina and J. Sachs, "Political Parties and the Business Cycle in the US”, Journal of Money, Credit and Banking 20: 63-82, 1988.
[6] P. Minford and D. Peel, "The Political Theory of the Business Cycle”, European Economic Review, 17(2), 1982.
[7] F. Kydland and E. C. Prescott, "Rules Rather than Discrretion: The Inconsistency of Optimal Plans”, Journal of Political Economy, 85 (3), 1977.
[8] R. J. Barro and D. B. Gordon, "A Positive Theory of Monetary Policy in a Natural Rate Model”, Journal of Political Economy, 91 (4), 589–610, 1983.
[9] W. D. Nordhaus, " The Political Business Cycle”, Review of Economic Studies, 42(2), pp. 169-190, 1975.
[10] A. Cukierman and A. H. Meltzer, "A Positive Theory of Discretionary Policy, the Cost of a Democratic Government, and the Benefits of a Constitution”, Economic Inquiry 24 (3), 1986.
[11] K. S. Rogoff, "Equilibrium Political Budget cycles”, NBER Working Paper No. 2428, 1987.
[12] K. Rogoff and A. Sibert, "Elections and Macroeconomic Policy Cycles”, The Review of Economic Studies, 55(1), pp. 1-16, 1988.
[13] Act on the Magyar Nemzeti Bank, www.mnb.hu/...jegybank/.../jegybanktorv_en.pdf‎ (Assessed: 20.10.2013).
[14] World Economic Outlook Database, http://www.imf.org/external/pubs/ft/weo/2013/01/weodata/index.aspx (Assessed: 01.10.2013).