Elections and the Fed: Is There a Political Monetary Cycle?

Abstract

To understand the causes of macroeconomic policy, it is necessary to examine the institutions that actually make such policy and the incentives those institutions face. An explanation of the causes of United States monetary policy must treat the various institutions that are influential in the monetary policy process, which are, at a minimum, the Federal Reserve (Fed) and the executive (including the president, the Treasury Department, and other advisors in the Executive Office of the President). The reelection motive has proven useful in modeling presidential incentives. In this article I investigate whether electoral incentives associated with the theory of the political business (PBC) can help to explain the behavior of the Fed over the last quarter century. The business cycle has had a curious hold on modern economy. While the empirical evidence in favor of the cycle is far from overwhelming, its theoretical importance leads to continuing empirical