Why separate monetary policy from banking supervision?

This paper provides a political-economy explanation for the separation of monetary policy from banking supervision by examining whether this institutional arrangement serves the platforms of the Conservative or of the Liberal parties, which are assumed to favor a stable price level and non-stable prices respectively. This paper shows this institutional design best serves the objectives of the Conservative party, provided the probability of banking crises is low. Thus this paper explains why European Monetary Union member states, which have led low-inflation policies since the mid-1980s, retained national Banking Authorities to supervise their banking systems when they created the European Central Bank. Journal of Comparative Economics 36 (3) (2008) 388-411.