Examining legislative challenges to central bank autonomy: macroeconomic and agency costs models

Abstract

This study examines the determinants of legislative threats (from the US Congress) to the Federal Reserve’s prerogatives (e.g., budgetary authority, autonomy, secrecy, etc.). Specifically, two competing theories of legislative threats – one relating the Fed’s management of the macro economy and the other to the Fed’s expense preference behavior (i.e., its budget-building activity) – are empirically modeled. The results suggest that aspects of both the “macroeconomic model” and the “agency costs/political model” have merit. However, tests of non-nested hypotheses indicate the superiority/dominance of the latter model in explaining variations in legislative threats from Congress over time (1964–1993).