Political Economists or Political Economists? The Role of Political Environments in the Formation of Fed Policy Under Burns, Greenspan, and Bernanke

Abstract

How do political environments influence the behavior of economists who transition from academic and business environments to policymaking positions? And, more specifically, are an economist’s preexisting beliefs and principles congruent with their policy stances and actions once they transition into a policy role? These questions are particularly relevant when it comes to central banking because central bankers, who wield substantial economic influence, are often selected for policy roles based partly on their stated principles and beliefs. To address these questions, we analyze the writings and speeches of three economists, Arthur Burns, Alan Greenspan, and Ben Bernanke, as they transitioned to becoming chairmen of the Fed. The tension between their previously stated views and their subsequent policy stances as Fed chairmen suggest that operation within political institutions impelled them to alter their views. Our findings suggest it is important to take a realistic view of politics and the political process when discussing central banking and monetary policy.

Keywords: Central banking, monetary policy, public choice, political economy

JEL Classification: D73, E58, H00, P16