The use of inputs by the Federal Reserve System: An extended model

Abstract

Recently it has been argued that bureaucratic incentives play an important role in the formulation of policy and the inflationary bias of the Federal Reserve System [Shughart and Tollison (1983), hereafter S—T].1 In particular S—T maintain that the Fed can retain profits denominated in amenities but not in dollars as a result of the Congressional constraint that 'excess profits' be returned to the Treasury. This constraint provides bureaucratic incentives for the Fed to purchase more amenities than a for-profit organization and ex-plains (S—T, 1983: 291) "in part the Fed's apparent inflationary bias." Expansionary monetary policy, then, enlarges the Fed's profit-amenities choices and allows it to pursue its goal of bureaucratic enhancement. S—T assume that the dollar value of these amenities is a monotonic transformation of Fed employment. Using this public choice framework, they develop a model in which the monetary base is a function of a number of variables including employment in the Federal Reserve System (SYSEMP).