Does Presidential Partisanship Affect Fed Inflation Forecasts?
31 Pages Posted: 13 Jul 2012 Last revised: 15 Nov 2012
Date Written: November 11, 2012
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
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