Abstract
It has recently been argued that the fiscal relationship between the Federal Reserve and the Treasury, by which the Fed keeps a portion of its earnings, imparts an inflationary bias to monetary policy because that relationship gives the Fed an incentive to increase its earnings by increasing the monetary base. This hypothesis is tested within the framework of a Federal Reserve objective function incorporating bureaucratic and social goals, and no evidence is found to support it.
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We are grateful to Mike Cox, Leroy Laney, Jerry O'Driscoll, and Ken Robinson for helpful discussions, to Priscilla Cooke, Faye Kisel, Steve Prue, and John Sciortino for research assistance, and to an anonymous referee for improvements in exposition. Research was supported by the Wake Forest University Graduate Council and was partly carried out at the Federal Reserve Bank of Dallas, which generously provided the use of its facilities. None of these individuals or institutions necessarily subscribes to the views presented here.
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Crihfield, J.B., Wood, J.H. Bureaucracy, altruism, and monetary policy. Public Choice 76, 233–247 (1993). https://doi.org/10.1007/BF01049322
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DOI: https://doi.org/10.1007/BF01049322