Independent but Not Indifferent: Partisan Bias in Monetary Policy at the Fed

Economics and Politics, Forthcoming

36 Pages Posted: 25 Oct 2012

See all articles by William Roberts Clark

William Roberts Clark

University of Michigan at Ann Arbor

Vincent Arel-Bundock

University of Michigan at Ann Arbor

Date Written: October 24, 2012

Abstract

Independent central banks are thought to be effective inflation hawks because they are run by technocrats with conservative monetary policy preferences. But central bankers can only protect their independence by compromising with the elected officials who grant them their independence. Policy, therefore, is likely to be a weighted average of the preferences of the central bank and the government. Consequently, central bankers may be eager to help right-wing governments stay in power and oppose the election of left-wing governments. We show evidence from the United States that interest rates (a) decline as elections approach when Republicans control the White House, but rise when Democrats do; and (b) are sensitive to the inflation rate (output gap) when Democrats (Republicans) are in the White House. Thus, the Federal Reserve is a conditional inflation hawk. Since the Fed became operationally independent in 1951, the Republicans have exhibited a decided electoral advantage in presidential politics.

JEL Classification: E5, E52, E58

Suggested Citation

Clark, William Roberts and Arel-Bundock, Vincent, Independent but Not Indifferent: Partisan Bias in Monetary Policy at the Fed (October 24, 2012). Economics and Politics, Forthcoming. Available at SSRN: https://ssrn.com/abstract=2166647

William Roberts Clark (Contact Author)

University of Michigan at Ann Arbor ( email )

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

Vincent Arel-Bundock

University of Michigan at Ann Arbor ( email )

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