VoxEU Column Monetary Policy Institutions and economics

Discovering the political Phillips curve: Parliamentary voice on ECB monetary policy

What are central banks held accountable for by elected officials? This column employs structural topic models on a new dataset of the Monetary Dialogues between the Members of the European Parliament and the President of the ECB to reveal differences in how MEPs keep the ECB accountable for its primary objective of price stability. It also shows that unemployment is a key explanatory variable for the political voice articulated by individual MEPs in accountability settings. These findings reveal the existence of a ‘political’ Phillips curve reaction function.

Over the past decade, central banks worldwide have significantly expanded the policy toolkit through which to achieve their price stability objective. Among the several consequences of this expansion of monetary policy tools, central banks’ recent actions have revived the debate about the relationship between independence and accountability (de Haan et al. 2008, Fraccaroli et al. 2018, McPhilemy and Moschella 2019, Tucker 2019), with its implications in terms of trust and transparency (Reichlin et al. 2021, van der Cruijsen and Samarina 2021).

Indeed, central banks’ responses to the financial and economic crises of 2008 and 2020 have raised important questions over whether their accountability frameworks “are well adapted to the new era of highly interventionist central bank policies” (Braun and Hoffmann-Axthelm 2017) and adequate for the challenge of ensuring that independence does not stand in the way of “the normal public conflict and institutional checking before policy is made” (Jacobs et al. 2021).

While an extensive literature in economics and political science exists on the procedures and mechanisms through which central banks account for their actions (de Haan et al. 2005, Crowe and Meade 2008, Masciandaro and Quintyn 2016, Moschella et al. 2020), far less attention has been devoted to the other side of the accountability relationship, namely, the political voice through which policymakers keep the central bank accountable (notable exceptions are Schonhardt-Bailey 2013, Collignon and Diessner 2016, and Fraccaroli et al. 2020). 

This neglect is not without consequences. A limited understanding of the standards against which policymakers consider the central bank accountable risks obscuring the informal channels through which politics exerts an influence on monetary policy despite the de jure statutory arrangements in place to safeguard central bank independence. This is especially the case at a time when independence looks particularly vulnerable because of populist politics, rising public debt, and dwindling public support for central banks, at least in advanced economies (Goodhart and Lastra 2018, Rodrik, 2018, Masciandaro and Passarelli 2019, Peia and Romelli 2019). Therefore a key question arises: what are central banks held accountable for by elected officials? 

Parliamentary voice on ECB monetary policy 

In a recent paper (Ferrara et al. 2021), we investigate politicians’ voice on accountability by examining the hearings of the ECB before Members of the European Parliament (MEPs) in the framework of the quarterly Monetary Dialogues. Studying elected officials’ accountability practices towards the ECB offers a number of important empirical advantages. To start with, as a supranational central bank, the ECB’s performance is subject to the scrutiny of politicians whose preferences vary along different country and political dimensions. Thus, zooming in on the political voice articulated within the European Parliament allows us to analyse the effect of economic heterogeneity among the different constituencies represented by elected officials. A further advantage of studying the ECB stems from the fact that the institution has a primary mandate that singles out price stability as the central bank’s primary objective and subordinates the pursuit of other objectives. These governance features allow us to clearly ascertain whether politicians emphasise the principal or secondary objectives in keeping the central bank accountable. Our empirical analysis of political voice relies on a novel dataset of the ECB’s Monetary Dialogues and state-of-the-art quantitative text analysis techniques. Two major findings derive from the analysis. 

First, we show that political voice on central bank accountability significantly varies over time and across policymakers. In particular, we find that MEPs do not always hold the central bank accountable for the primary objective of price stability that has been delegated to the ECB (Figure 1). European politicians also attempt to keep the central bank accountable for a broader set of issues that are connected with, but distinct from, the central bank’s primary goal.

Figure 1 Political voice on ECB by topic and mission, 1999–2019


Source: Ferrara et al. (2021)

Second, employing panel data, we provide evidence that MEPs react to differentials in unemployment in their constituencies: the higher the domestic unemployment rate in the country where they have been elected, the lower policymakers’ attention to price stability (Figure 2). These results reveal the existence of a ‘political’ Phillips curve reaction function that enriches our understanding of the principal-agent accountability relationship between politicians and central bankers. 

Figure 2 Marginal effect of unemployment on the predicted share of MEPs’ voice on primary mission


Source: Ferrara et al. (2021)

Specifically, our results suggest that elected policymakers are less likely to hold the central bank accountable for its primary objective of price stability when labour market conditions are worse in their home country.


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Ferrara, F M, D Masciandaro, M Moschella and D Romelli (2021), “Political Voice on Monetary Policy: Evidence from the parliamentary hearings of the European Central Bank”, European Journal of Political Economy, forthcoming. 

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