Does Presidential Partisanship Affect Fed Inflation Forecasts?

31 Pages Posted: 13 Jul 2012 Last revised: 15 Nov 2012

See all articles by Christopher Gandrud

Christopher Gandrud

City University London - International Political Economy; Hertie School of Governance

Cassandra Grafström

Hertie School of Governance; University of Michigan at Ann Arbor

Date Written: November 11, 2012

Abstract

Recent work argues that policy-makers at the United States Federal Reserve are not politically indifferent (Clark and Arel-Bundock, 2011). The Fed tends to choose looser monetary policies during Republican administrations, possibly in order to ensure the (re)election of ideologically preferred presidents. This model excludes an essential aspect of monetary policy decision-making: expectations about future inflation. We use the Fed’s Green Book forecasts to test whether presidents’ partisan identification shapes the estimates of future economic performance that influence FOMC policies. We find that Federal Reserve staff probably do not bias their forecasts to influence Fed governors around elections. However, they do systematically overestimate inflation during Democratic presidencies and underestimate inflation during Republican ones. This suggests that while not electorally motivated, Fed staff have a partisan bias when making inflation forecasts.ill be provided by author.

Keywords: forecast bias, Federal Reserve, rational partisan cycle, heuristics, interest rate, inflation

Suggested Citation

Gandrud, Christopher and Grafström, Cassandra, Does Presidential Partisanship Affect Fed Inflation Forecasts? (November 11, 2012). APSA 2012 Annual Meeting Paper. Available at SSRN: https://ssrn.com/abstract=2105301

Christopher Gandrud (Contact Author)

City University London - International Political Economy ( email )

Northampton Square
London, EC1V 0HB
United Kingdom

Hertie School of Governance ( email )

Schlossplatz 1
Berlin, 10178
Germany

Cassandra Grafström

Hertie School of Governance ( email )

Schlossplatz 1
Berlin, 10178
Germany

University of Michigan at Ann Arbor ( email )

500 S. State Street
Ann Arbor, MI 48109
United States

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