The Myth of Fed Political Independence

Abstract

According to the Employment Act of 1946, the mandated goals of the Federal Reserve are price stability and economic growth. But is the Federal Reserve little more than financing agent of the U.S. Congress? Is the Fed just another political agency of the U.S. government doing the will of the legislative and executive branches? This paper summarizes the results of an empirical investigation into the relationship between fiscal and monetary policies during the dozen or so years following the end of the global financial crisis in 2010. An examination of the speed with which fiscal policy "shocks" were accommodated by the Federal Reserve provides insights into the monetary policymaking process.

Keywords: Dickey-Fuller unit root test, Engle-Granger cointegration test, error correction model, Johansen cointegration test, monetary policy. JEL: C12, E31, E52, E58