Unlocking the Secrets of the Temple: An Analysis of the Politics of the FOMC
31 Pages Posted: 29 Aug 2013
Date Written: 2013
Using a novel data set based on verbally expressed preferences between 1989 and 2007, I show that members of the Federal Reserve's Open Market Committee (FOMC) are not completely apolitical. That is, they may not be willing to cut interest rates to support the president's electoral objectives, but they are much less willing to raise interest rates during times of declining presidential approval and political scandal. This is particularly true among copartisans (Fed governors that are of the same party as the president) and as an election approaches. The chairman is also an conditional inflation hawk, willing to use monetary policy to fight inflation during the Clinton Administration, but apparently not in Republican administrations. This is a concerning finding given the vast literature suggesting that politicization of central banking leads to suboptimal macroeconomic outcomes.
Keywords: monetary policy, Federal Reserve
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