Domestic Political Sources of American Monetary Policy: 1955-82

Abstract

This study investigates what domestic political factors affect monetary policy in the United States. Monetary policy is measured by changes in adjusted bank reserves. A reaction function is estimated using quarterly data for 1955-82. Independent economic variables in the reaction function are current and expected inflation, slackness, international reserves, the balance of payments, and the high employment surplus. Political variables examined are elections, party, administration, and the relationship between monetary and fiscal policy. Elections do not affect Fed policy. Monetary policy is easier under Democratic presidents; the Kennedy and Nixon administrations do not fit this general pattern. The effect of party and administration is linear; neither party nor administration affects the relationship between the state of the economy and Fed policy. Monetary and fiscal policy covaried during the 1960s; by the 1970s easy fiscal and tight monetary policy became more common.