Inflated Expectations: How Government Partisanship Shapes Monetary Policy Bureaucrats’ Inflation Forecasts

Political Science Research and Methods, Forthcoming

33 Pages Posted: 6 Aug 2012 Last revised: 16 Jun 2014

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: January 6, 2014

Abstract

Governments’ party identifications can indicate the types of economic policies they are likely to pursue. A common rule of thumb is that left-party governments are expected to pursue policies for lower unemployment, but which may cause inflation. Right-party governments are expected to pursue lower inflation policies. How do these expectations shape monetary policy bureaucrats’ inflation forecasts? If there is a mismatch between the policies bureaucrats’ expect governments to implement and those that they actually do, forecasts will be systematically biased. Using US Federal Reserve Staff’s forecasts we test for executive partisan biases. We find that irrespective of actual policy and economic conditions forecasters systematically overestimate inflation during left-party presidencies and underestimate inflation during right-party ones. Our findings suggest that partisan heuristics play an important part in monetary policy bureaucrats’ inflation expectations.

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

Suggested Citation

Gandrud, Christopher and Grafström, Cassandra, Inflated Expectations: How Government Partisanship Shapes Monetary Policy Bureaucrats’ Inflation Forecasts (January 6, 2014). Political Science Research and Methods, Forthcoming. Available at SSRN: https://ssrn.com/abstract=2125283 or http://dx.doi.org/10.2139/ssrn.2125283

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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