Advertisement

Did the fed raise interest rates before elections?

  • Alexander DentlerEmail author
Article

Abstract

The literature on political business cycles focuses on elected incumbents and neglects the incentives of appointed officials. We present evidence of rate hikes before elections when the chair of the US Federal Reserve is from a different party than the incumbent president. This finding contrasts with the traditional belief that an inappropriate policy-rate bias implies a more expansive pre-election policy stance. We also find weak evidence that rates are lowered when the chair and president are from the same party. The evidence that ideological preferences of the chair matter remains even when we control for career motives.

Keywords

Political business cycle Political monetary cycle Central bank independence Political appointments Taylor rule 

JEL Classification

E32 E58 E61 

Notes

Acknowledgements

The author declares that he has no conflict of interest. The views expressed in this paper are those of the author and do not necessarily reflect those of any affiliated institution(s). We thank three anonymous referees for their helpful suggestions. We are particular grateful for the support by Kenzo Rojo.

References

  1. Abrams, B. A. (2006). How Richard Nixon pressured Arthur Burns: Evidence from the Nixon tapes. Journal of Economic Perspectives, 20(4), 177–188.CrossRefGoogle Scholar
  2. Abrams, B. A., & Butkiewicz, J. L. (2012). The political business cycle: New evidence from the Nixon tapes. Journal of Money, Credit and Banking, 44(2–3), 385–399.CrossRefGoogle Scholar
  3. Abrams, B. A., & Iossifov, P. (2006). Does the Fed contribute to a political business cycle? Public Choice, 129, 249–262.CrossRefGoogle Scholar
  4. Alesina, A., Roubini, N., & Cohen, G. D. (1997). Political cycles and the macroeconomy. Cambridge: MIT press.CrossRefGoogle Scholar
  5. Alesina, A. (1987). Macroeconomic policy in a two-party system as a repeated game. Quarterly Journal of Economics, 102(3), 651–678.CrossRefGoogle Scholar
  6. Alpanda, S., & Honig, A. (2009). The impact of central bank independence on political monetary cycles in advanced and developing nations. Journal of Money, Credit and Banking, 41(7), 1365–1389.CrossRefGoogle Scholar
  7. Beck, N. (1987). Elections and the Fed: Is there a political business cycle? American Journal of Political Science, 31(1), 194–216.CrossRefGoogle Scholar
  8. Boschen, J. F., & Weise, C. L. (2003). What starts inflation: Evidence from the OECD countries. Journal of Money, Credit and Banking, 35, 323–349.CrossRefGoogle Scholar
  9. Cargill, T. F., & O’Driscoll, F. P, Jr. (2013). Federal Reserve independence: Reality or myth. Cato Journal, 33, 417.Google Scholar
  10. Carlsen, F. (1997). Opinion polls and political business cycles: Theory and evidence for the United States. Public Choice, 92(3–4), 369–385.CrossRefGoogle Scholar
  11. Chappell, H. W, Jr., McGregor, R. R., & Vermilyea, T. (2005). Committee decisions on monetary policy: Evidence from historical records of the federal open market committee. Cambridge: The MIT Press.Google Scholar
  12. Clarida, R., Gali, J., & Gertler, M. (2000). Monetary policy rules and macroeconomic stability: Evidence and some theory. Quarterly Journal of Economics, 115(1), 147–180.CrossRefGoogle Scholar
  13. Corder, K. (2006). Partisan politics and fed policy choices: A Taylor rule approach. In Presentation at the annual meetings of the midwest political science association, Chicago, IL.Google Scholar
  14. Drazen, A. (2000). The political business cycle. NBER Macroeconomics Annual, 15, 75–117.CrossRefGoogle Scholar
  15. Downs, A. (1957). An economic theory of democracy. New York.Google Scholar
  16. Funashima, Y. (2013). Reassessing the Fed’s behaviour towards presidential elections. Applied Economics Letters, 20(8), 795–798.CrossRefGoogle Scholar
  17. Gamber, E. N., & Hakes, D. R. (1997). The Federal Reserve’s response to aggregate demand and aggregate supply shocks: Evidence of a partisan political cycle. Southern Economic Journal, 63(3), 680–691.CrossRefGoogle Scholar
  18. Gamber, E. N., & Hakes, D. R. (2006). The Taylor rule and the appointment cycle of the chairperson of the Federal Reserve. Journal of Economics and Business, 58, 55–66.CrossRefGoogle Scholar
  19. Goodfriend, M., & King, R. G. (2005). The incredible Volcker disinflation. Journal of Monetary Economics, 52(5), 981–1015.CrossRefGoogle Scholar
  20. Greider, W. (1989). Secrets of the temple: How the Federal Reserve runs the country. New York: Simon & Schuster.Google Scholar
  21. Grier, K. B. (1987). Presidential elections and Federal Reserve policy: An empirical test. Southern Economic Journal, 54, 476–486.CrossRefGoogle Scholar
  22. Grier, K. B. (1989). On the existence of a political monetary cycle. American Journal of Political Science, 33, 376–389.CrossRefGoogle Scholar
  23. Hakes, D. R. (1990). The objectives and priorities of monetary policy under different Federal Reserve chairmen. Journal of Money, Credit, and Banking, 22, 327–337.CrossRefGoogle Scholar
  24. Havrilesky, T. M. (1995). The pressures on American monetary policy (2nd ed.). Norwell, MA: Kluwer Academic Publishers.CrossRefGoogle Scholar
  25. Haynes, S., & Stone, J. (1987). Does the political business cycle dominate United States unemployment and inflation. In T. Willett (Ed.), Political business cycles: The economics and politics of stagflation. San Francisco: Pacific Institute.Google Scholar
  26. Healy, A., & Lenz, G. S. (2014). Substituting the end for the whole: Why voters respond primarily to the election-year economy. American Journal of Political Science, 58(1), 31–47.CrossRefGoogle Scholar
  27. Hetzel, R. L. (1998). Arthur Burns and inflation. Federal Reserve Bank of Richmond Economic Quarterly, 84(1), 21–44.Google Scholar
  28. Hibbs, D. A. (1977). Political parties and macroeconomic policy. American Political Science Review, 71(4), 1467–1487.CrossRefGoogle Scholar
  29. Judd, J. P., & B. Trehan, (1995). Has the Fed gotten tougher on inflation? Federal Reserve Bank of San Francisco Weekly Letter, 95, (13).Google Scholar
  30. Judd, J. P., & Rudebusch, G. D. (1998). Taylor’s rule and the Fed: 1970–1997. Federal Reserve Bank of San Francisco Economic Review, 3, 3–16.Google Scholar
  31. Klose, J. (2012). Political business cycles and monetary policy revisited-an application of a two-dimensional asymmetric Taylor reaction function. International Economics and Economic Policy, 9(3–4), 265–295.CrossRefGoogle Scholar
  32. Kuper, G. H. (2018). The powers that are: Central bank independence in the Greenspan era. Empirical Economics, 54(2), 485–499.CrossRefGoogle Scholar
  33. Maisel, S. J. (1973). Managing the Dollar. New York: W. W. Norton and Company.Google Scholar
  34. Mayer, M. (2002). The Fed: The inside story of how the world’s most powerful financial institution drives the markets. New York: Penguin Putnam.Google Scholar
  35. Nordhaus, W. D. (1975). The political business cycle. Review of Economic Studies, 42, 169–190.CrossRefGoogle Scholar
  36. Orphanides, A. (2003). Historical monetary policy analysis and the Taylor rule. Journal of Monetary Economics, 50, 983–1022.CrossRefGoogle Scholar
  37. Price, S. (1997). Political business cycles and macroeconomic credibility: A survey. Public Choice, 92(3), 407–427.CrossRefGoogle Scholar
  38. Rogoff, K. (1988). Macroeconomics and politics: A comment. NBER Macroeconomics Annual, 3, 52–56.CrossRefGoogle Scholar
  39. Rogoff, K. (1990). Equilibrium political budget cycles. American Economic Review, 80, 21–36.Google Scholar
  40. Rogoff, K., & Sibert, A. (1988). Elections and macroeconomic policy cycles. Review of Economic Studies, 55, 1–16.CrossRefGoogle Scholar
  41. Romer, C. D., & Romer, D. H. (2004a). Choosing the Federal Reserve chair: Lessons from history. Journal of Economic Perspectives, 18(1), 129–162.CrossRefGoogle Scholar
  42. Romer, C. D., & Romer, D. H. (2004b). A new measure of monetary shocks: Derivation and implications. American Economic Review, 94(4), 1055–1084.CrossRefGoogle Scholar
  43. Rudebusch, G. D. (1995). Federal Reserve interest rate targeting, rational expectations, and the term structure. Journal of Monetary Economics, 35(2), 245–274.CrossRefGoogle Scholar
  44. Safire, W. (1975). After the fall. Garden City, NY: Doubleday.Google Scholar
  45. Stock, J. H., & Yogo, M. (2005). Identification and inference for econometric models. Identification and inference for econometric models: Essays in honor of Thomas Rothenberg, 6, 109–120.CrossRefGoogle Scholar
  46. Tufte, E. R. (1978). Political control of the economy. Princeton, NJ: Princeton University Press.Google Scholar
  47. Williams, J. T. (1990). The political manipulation of macroeconomic policy. American Political Science Review, 84(3), 767–795.CrossRefGoogle Scholar
  48. Woodward, B. (2000). Maestro: Greenspan’s Fed and the American boom. New York: Simon & Schuster.Google Scholar
  49. Woolley, J. (1984). Monetary politics. New York: Cambridge University Press.CrossRefGoogle Scholar

Copyright information

© Springer Science+Business Media, LLC, part of Springer Nature 2019

Authors and Affiliations

  1. 1.Centro de Investigacion y Docencia EconomicasMexico CityMexico

Personalised recommendations