THE FED AND THE POLITICAL BUSINESS CYCLE

This study asks whether the Federal Reserve has actively made monetary policy so as to aid the president's reelection. Using Shiller's smoothness "prior" to estimate the shape of cycles, the study finds a political business cycle in unemployment and a preelection increase in growth of the money supply. But the timing of these two cycles is inconsistent. Furthermore, little evidence exists of a cycle in the instruments of monetary policy. Thus, the Fed is not actively creating a political business cycle. Apparently, movements in real money that are not caused—but are not offset—by the Fed are an important cause of the political business cycle.
Elections influence Fed behavior. Monetary tightness occurs early in a presidential term, before reelection incentives become critical. This is due to the Fed's political weakness. Thus, the Fed's independence only partly insulates it from electoral pressures.     

THE FED AND THE POLITICAL BUSINESS CYCLE

This study asks whether the Federal Reserve has actively made monetary policy so as to aid the president's reelection. Using Shiller's smoothness "prior" to estimate the shape of cycles, the study finds a political business cycle in unemployment and a preelection increase in growth of the money supply. But the timing of these two cycles is inconsistent. Furthermore, little evidence exists of a cycle in the instruments of monetary policy. Thus, the Fed is not actively creating a political business cycle. Apparently, movements in real money that are not caused—but are not offset—by the Fed are an important cause of the political business cycle.
Elections influence Fed behavior. Monetary tightness occurs early in a presidential term, before reelection incentives become critical. This is due to the Fed's political weakness. Thus, the Fed's independence only partly insulates it from electoral pressures.     

Federal reserve monetary policy and the non-linearity of the Taylor rule

We propose and estimate a generalized Taylor rule for the monetary policy of the US Federal Reserve (Fed) to find out how the Fed funds rate is sensitive to changes in inflation and output gap variables in the post war period. We find that Fed's monetary policy has only reacted significantly to changes in inflation when they were between approximately 6.5–8.5%. However, the policy stance change on these changes was relatively small. The findings suggest that the US Fed has been too averse to change from its current monetary policy stance, and that it has not reacted noticeably to changes in the US economic activity, as measured by the output gap. The generalized functional form for the monetary policy rule suggests that similar non-linearity exists in the directional change of the Fed rate.     

DID TIME INCONSISTENCY CONTRIBUTE TO THE GREAT INFLATION? EVIDENCE FROM THE FOMC TRANSCRIPTS

We use evidence from detailed records of FOMC deliberations to argue that time inconsistency theory can help explain the excessive monetary expansion that characterized Arthur Burns's tenure as Federal Reserve Chairman (1970–1978). The records suggest that the Fed perceived a Phillips curve tradeoff and political pressures that made it difficult to adopt disinflationary policies; the tendency toward excessively expansionary policy was exacerbated by the short-run planning horizon the Committee faced in each of its meetings. We argue that comparative static predictions of the time inconsistency model are consistent with the rise of inflation during the Burns years and its subsequent fall.     

BUSINESS FAILURES AND MACROECONOMIC FACTORS IN THE UK

We examine the interactions between business failures and macroeconomic aggregates, and specifically the accounts of policy-induced changes in the macroeconomy for the observed fluctuations of UK business failures in the period 1966–2003 using the vector error-correction model (VECM). The results demonstrate that macroeconomic aggregates, i.e., interest rate, credit, profits, inflation and business births, exert differential impacts on business failures both in the short run and in the long run. The study reveals that structural changes in the financial and real sectors during the examined period have made an impact on the way in which the macroeconomy affects business failures. In particular, business failures are increasingly reacting to monetary policy changes in the post-1980 period. Furthermore, the shocks to business failures can generate large fluctuations in macroeconomic aggregates, suggesting the importance of corporate balance sheets in financial stability and economic growth. The paper's findings carry policy implications that are related to the survival of firms in distress and finance-driven business cycles.     

SYSTEMATIC MONETARY POLICY AND THE MACROECONOMIC EFFECTS OF SHIFTS IN RESIDENTIAL LOAN-TO-VALUE RATIOS

What are the macroeconomic consequences of changing aggregate lending standards in residential mortgage markets, as measured by loan-to-value (LTV) ratios? Using a structural vector autoregression (VAR), we find that GDP and business investment increase following an expansionary LTV shock. Residential investment, by contrast, falls after a small initial uptick, a result that depends on the systematic reaction of monetary policy. We show that, historically, the Fed tended to respond to expansionary LTV shocks by raising the monetary policy instrument, and, as a result, mortgage rates increased and residential investment declined. House prices are affected in a similar manner.     

DO POLITICS CAUSE REGIME SHIFTS IN MONETARY POLICY?

Whether or not politics cause changes in monetary policy is controversial in the literature. This article re‐examines the link between politics and regime shifts in monetary policy using two alternative approaches. First, empirical results show that both the presidential and Federal Reserve Bank (Fed) chairmanship regimes do not influence monetary policy under the assumption that the Fed closely follows an interest rate rule. On the other hand, evidence also suggests that changes in political regimes are able to account for the deviations from the optimal Taylor rule. (JEL E52, E58, D78)     

MACROECONOMIC POLICY AND ELECTIONS IN OECD DEMOCRACIES*

The purpose of this paper is to test for evidence of opportunistic “political business cycles” in a large sample of 18 OECD economies. Our results can be summarized as follows: 1) We find very little evidence of pre-electoral effects on economic outcomes, in particular, on GDP growth and unemployment; 2) We see some evidence of “political monetary cycles,” that is, expansionary monetary policy in election years; 3) We also observe indications of “political budget cycles,” or “loose” fiscal policy prior to elections; 4) Inflation exhibits a post-electoral jump, which could be explained by either the pre-electoral “loose” monetary and fiscal policies and/or by an opportunistic timing of increases in publicly controlled prices, or indirect taxes.     

SHORT-RUN MONETARY POLICY AND THE MACROECONOMIC ENVIRONMENT

This study investigates factors influencing monetary policy decisions of the Federal Open Market Committee (FOMC) over the period 1960–1998. Competing perspectives regarding the process of monetary policy making exist, with some researchers contending the FOMC makes short-run policy decisions based solely on "objective" macroeconomic considerations and others arguing that political and other nonmacroeconomic considerations significantly influence monetary policy voting. Empirical studies support both views in varying degrees. This article presents a model of FOMC decision making which posits that (1) the current/prospective macroeconomic environment at the time of FOMC meetings is the most important consideration of monetary policy makers, and (2) nonmacroeconomic variables receive little attention unless macroeconomic conditions are difficult for policy makers to assess. Probit results support the implications of the model.     

HOW DID UNCONVENTIONAL MONETARY POLICY AFFECT ECONOMIC FORECASTS?

We study how unconventional monetary policy announcements affected professional forecasters' predictions of bond rates, gross domestic product growth and inflation using data from the monthly survey by the Wall Street Journal. We find that unconventional monetary policy (UMP) announcements moved predicted bond rates in the direction the Fed intended. UMP announcements had differential impacts on forecasters' predictions; they also tended to move growth and inflation predictions in directions opposite those the Fed intended due to Fed information effects. A policy implication of our study is that the Fed should communicate economic projections to the public separately from monetary policy announcements to mitigate Fed information effects. (JEL E52, E58)     

TALKING LESS AND MOVING THE MARKET MORE: EVIDENCE FROM THE ECB AND THE FED

This paper examines and compares the communication strategies of the Federal Reserve and the European Central Bank, and their effectiveness. First, we find that the surprise components of both monetary policy actions and statements have important but differing effects on asset prices, with unexpected communication having a much greater impact on longer‐term interest rates. Second, both the ECB and the Fed have proven to be equally successful in moving their domestic asset prices using either monetary policy or news shocks. However, the response of the American yield curve to the surprise component of Fed's statements is larger than the reaction of the European term structure to ECB's announcements. This result is intimately related to the amplitude of the policy rate cycle that is much larger in the US than in the euro area combined with the bounded support of the news shock. Third, we analyze the cross‐effects and show that the Fed has been more able to move the European interest rates of all maturities than the ECB to move American rates. This finding is tied to the predominance of dollar fixed income assets rather than to an attempt of the ECB to mimic the Fed.     

OUTSIDE INFLUENCES ON MONETARY POLICY: A SUMMARY OF RECENT FINDINGS

This paper reports on a program that begun in 1985 to research political and private pressures on monetary policy. The program developed a number of measures of outside pressures on monetary policy, identified the time periods and circumstances under which the Federal Reserve was responsive to these measures, and indicated how different classes of Fed officials responded to certain of these pressures. Initial findings appear in a number of journal articles from 1987 to 1992. Havrilesky (1993) extends and refines these findings by employing new and larger data sets. Subsequent articles amplify the findings by estimating monetary policy reaction functions that specifically introduce outside influences together with state-of-the-economy measures as explanatory variables .     

The link between the federal funds rate and banking system distress: An empirical investigation

We investigate the association between deviations of the monetary policy rate from its benchmark, and systemic risk between 2001 and 2017. We adopt an impulse response function framework that uses the local projections method model proposed by Jorda (2005). We find that paying interest on reserves by the Fed beginning in 2008 introduced a monetary policy regime shift between the period that the Fed did not pay interest on reserves and the period that it did. Consequently, while we identify a positive and significant link between deviations of the policy rate from its benchmark and systemic risk in the former period, this link was broken in the latter period. During the former period, upsurges in the fed funds rate raised bank costs and increased bank distress. In contrast, during the latter period, interest payment on reserves exceeded the policy rate, except for 2009Q1, and as a result, banks did not expand lending in response to the Fed's reserve injections, instead, holding large amounts of excess reserves. This practice produced greater bank profitability and reduced bank liquidity risk and credit risk, without increasing systemic risk.     

Monetary policy implementation and transmission in the European Monetary Union

I discuss possible problems engendered by loss of national monetary policies, and study them from three empirical perspectives. First, are business cycles sufficiently synchronized across EMU member countries? The evidence suggests that economic activity in those countries has become increasingly correlated in the 1990s, and that policy co–ordination has played a role in generating that outcome. Second, are there asymmetries in the mechanisms through which policy affects economic activity? The paper documents that policy transmission was indeed heterogeneous in the member countries, and that structural and financial factors were sensibly related to cross–country differences in the response of output to a monetary policy shock. Third, how is policy implemented in an environment of diverse business cycle fundamentals and transmission mechanisms? Estimation of monetary policy reaction functions finds that the European Central Bank is closer to an aggregate of the central banks in Germany, France, and Italy than to the Bundesbank alone.     

Why has US monetary policy become ineffective lately?

Some recent studies show that US monetary policy has lost its stimulative traction, especially since the early 1980s. They argue that the Fed’s forward guidance has enabled economic agents to anticipate the changes in interest rates more accurately. As a result, it is harder to find truly exogenous monetary policy shocks, which has made monetary policy ineffective. In this article, we find that anomalous economic behaviours of financial institutions might be the true reason for the ineffective monetary policy. Our structural vector autoregressive model shows that increases in the US money supply mostly flowed into the financial sector to increase its profits instead of stimulating the real sector of the economy through business investment.     

INFLATION AND SWITCHES BETWEEN SPECIE AND PAPER STANDARDS IN SWEDEN 1668 - 1931: A PUBLIC FINANCE INTERPRETATION

In this study, the recent literature on the integration of fiscal and monetary policy is used to examine the suspensions and resumptions of currency convertibility in Sweden during the period 1668–1931. We demonstrate that urgent demands for financing of war expenditures forced the Swedish Riksbank to abandon convertibility of its notes in all cases of suspensions prior to 1914. We argue that the suspension periods should be regarded as unexpected lapses into discretion from rule-bound convertibility regimes rather than as part of an optimal ex ante public finance policy. All resumptions of convertibility, except for the resumption of 1924, implied an ex post formal devaluation. All suspensions were illegal, except in 1931 when a constitutional escape clause was invoked.     

Has the Fed been a failure?

As the 100th anniversary of the 1913 Federal Reserve Act approaches, we assess whether the nation’s experiment with the Federal Reserve has been a success or a failure. Drawing on a wide range of recent empirical research, we find the following: (1) The Fed’s full history (1914 to present) has been characterized by more rather than fewer symptoms of monetary and macroeconomic instability than the decades leading to the Fed’s establishment. (2) While the Fed’s performance has undoubtedly improved since World War II, even its postwar performance has not clearly surpassed that of its undoubtedly flawed predecessor, the National Banking system, before World War I. (3) Some proposed alternative arrangements might plausibly do better than the Fed as presently constituted. We conclude that the need for a systematic exploration of alternatives to the established monetary system is as pressing today as it was a century ago.     

Election cycles in mining licensing: theory and evidence from Albania

Most of the literature on political business and budgetary cycles (PBBC) has focused on fiscal and monetary policy variables in advanced-country contexts. We extend this literature by investigating political cycle effects in a non-monetary, non-fiscal policy regime (the allocation of mining licences) in a transition country context. We propose a model of mining licensing that allows for corruption and for both supply and demand effects to determine the outcome. We then estimate this model using time-series data from post-communist Albania. Relying on a dynamic Poisson model, we find evidence of both opportunistic and partisan effects. Based on our theory, we suggest a corruption interpretation of political cycles in non-fiscal/non-monetary variables. This interpretation, we suggest, may be more applicable to the context of developing and transition countries. Our study raises important questions about the unintended (and often pernicious) effects of transition politics on economic regulation and economic performance in post-socialist economies.     

Federal Reserve communications and newswire coverage

In this article, we explore the determinants of newswire coverage of Federal Reserve (Fed) communications. Our sample covers all 344 forward-looking communications made in the period May 1999 to May 2004. We find, first, that there is a higher likelihood of newswire coverage for monetary policy reports and speeches by Chairman Greenspan than for testimony and speeches by other Fed members. Furthermore, communications with an explicit monetary policy inclination or tone different from the current interest rate path are particularly likely to be covered. However, the release of important macroeconomic news reduces the likelihood of newswire coverage. Second, speeches by regional Fed presidents are relatively less likely to be reported than speeches by Board members. Nevertheless, newswire coverage of Fed president speeches is more likely if central bank communication is stale. Finally, our results indicate that Ben Bernanke played a distinguished role even before his Chairmanship.