Political Monetary Cycles Under Alternative Institutions: The Independent Treasury and the Federal Reserve

20 Pages Posted: 8 Dec 2005

See all articles by Jac C. Heckelman

Jac C. Heckelman

Wake Forest University - Department of Economics

John Wood

Wake Forest University - Department of Economics

Abstract

The theory of opportunistic political business cycles predicts incumbent politicians will alter their economic policies to spur short-run growth to attract additional votes for the upcoming election. There has not been much emphasis on the possibility of historical political business cycles prior to the Keynesian Revolution. No study has yet undertaken a systematic approach to testing for policy cycles during this period. Our study will bridge this gap by considering cycles in monetary policy for the periods of 1879-1914 until the start of Fed operations, and 1914-1932 until abandonment of the gold standard. To properly test for political cycles, it is necessary to develop reaction functions for the Treasury and compare against the reaction function later held by the Fed. This also reveals that creation of an independent monetary authority to be insulated from political pressures changed the manner in which policy was directed, aside from political issues. The evidence is not consistent, however, with monetary cycles closely tied to electoral concerns.

Suggested Citation

Heckelman, Jac C. and Wood, John, Political Monetary Cycles Under Alternative Institutions: The Independent Treasury and the Federal Reserve. Economics & Politics, Vol. 17, No. 3, pp. 331-350, November 2005, Available at SSRN: https://ssrn.com/abstract=856729 or http://dx.doi.org/10.1111/j.0954-1985.2005.00156.x

Jac C. Heckelman (Contact Author)

Wake Forest University - Department of Economics ( email )

P.O. Box 7505
Winston-Salem, NC 27109
United States
(336) 758-5923 (Phone)
(336) 758-6028 (Fax)

HOME PAGE: http://www.wfu.edu/~heckeljc/jac.htm

John Wood

Wake Forest University - Department of Economics ( email )

Carswell 125
Winston-Salem, NC 27109
United States
910-759-5250 (Phone)
Not available (Fax)

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