Opaque rather than transparent: Why the public cannot monitor monetary policy

Federal Reserve officials and many observers of monetary policy claim that the implementation of monetary policy has become more “transparent” over the last decade. This paper argues that monetary policy is anything but transparent because multiple and conflicting goals for monetary policy still exist, precise targets for these goals never are defined, the Fed’s economic model is unknown to the public and, by confusing its apparent intermediate target variable with its true policy instrument, actions taken to be stimulative can be contractionary and vice versa.     

Federal Reserve transparency: The more things change, the more they stay the same?

The calculus of electoral politics and the central bank’s bureaucratic objectives can explain the recent trend toward greater Federal Reserve transparency and can shed light on the likelihood that this trend will continue. If incumbent politicians see no electoral advantage in pressuring the Fed to become still more transparent, and if the Fed sees no benefit to greater transparancy, then further changes in current practice are unlikely. Private sector agents will continue to face a significant degree of uncertainty about the Fed’s policy objectives and about the information that policymakers consider in the monetary policy decision process.     

EXPLAINING FEDERAL RESERVE MONETARY POLICY

In an examination of Federal Funds rate monthly from 1954 to 2000, we compare a model using presidential party as a compositional variable with a model using presidential party as an interactive variable. Federal Reserve monetary policy was found responsive to the economy, to business elites, and to political circumstances. However, these influences had different patterns depending upon presidential party. The Federal Reserve appears to act neither randomly nor in isolation. It is responsive to the economy and interest groups but a President's partisan preference is particularly influential in decisions on monetary policy.     

A multinominal logit analysis of the influence of policy variables and board experience on FOMC voting behavior

Previous studies have used probit or logit models to analyze two states of monetary policy (tighter or looser). In this paper we employ multinominal logit to permit Federal Reserve monetary policy to assume one of three alternative states (tighter, looser, or no change) as a function of three independent economic variables (unemployment, real growth, and inflation) and the amount of experience of the Board of Governors. The results indicate that the Federal Reserve reacted differently under Burns, Miller and Volcker and between Volcker's two operating procedures in the formulation of monetary policy.     

Lobbying,political connections and emergency lending by the Federal Reserve

This paper tests whether the political connections of banks were important in explaining participation in the Federal Reserve’s emergency lending programs during the recent financial crisis. Our multivariate tests show that banks that were politically connected—either through lobbying efforts or employment of politically connected individuals—were substantially more likely to participate in the Federal Reserve’s emergency loan programs. In economic terms, participation in these programs was 28–36% more likely for banks that were politically connected than for banks that were not politically connected. In our final set of tests, we attempt to identify a proper explanation for this peculiar relationship. While a broad literature speaks of the moral hazard associated with receiving bailouts, we test whether another type of moral hazard exists in the period preceding the bailout. In particular, we argue that, to the extent that political connections act as synthetic insurance, banks may have engaged in more risky behavior that lead them to the Fed’s emergency lending facilities. Tests seem to confirm this explanation.     

EXPANDING THE LIMITS OF POWER: The Federal Reserve and the Implementation of Functional Regulation in the Gramm-Leach-Bliley Era

Research on bureaucratic behavior suggests that agencies are more likely to use the implementation process to extend their power and influence under particular circumstances. I argue that when an agency has been delegated considerable power by Congress, but provided only vague guidance on how to implement this authority, an atmosphere of uncertainty and competition is created. Under such a circumstance the agency will feel pressured to further extend its power in order to defend its regulatory turf against competitors and protect the authority it was delegated. I test this proposition by examining the behavior of the Federal Reserve as it implements the functional regulation provisions of the Gramm‐Leach‐Bliley Act. Evidence from the Federal Reserve's dealings with the Securities and Exchange Commission during the approval of the Schwab – U. S. Trust merger provides evidence that the Fed is indeed acting to extend its power and influence.     

Does the Fed Contribute to a Political Business Cycle?

In contrast to findings of other studies, evidence is presented to support the existence of a Federal Reserve-induced political monetary cycle that corresponds to the U.S. presidential election cycle. Using various Taylor rules, we find support for the view that Fed policy turns significantly more expansionary in the seven quarters prior to the election, but only when the Fed chair and incumbent presidential party have partisan affiliations.     

Federal reserve appointments and the politics of senate confirmation

Public Choice - This paper examines the politicization of Federal Reserve (Fed) appointments. In contrast to the extant appointment literature’s almost exclusive focus on ideological...     

Monetary policy and presidential elections: A nonpartisan political cycle

This paper develops a Federal Reserve reaction function which relates policy intentions to forecasts of policy objectives. Pre- and postpresidential election estimates of this reaction function for the post-Accord period of 1953–1984 suggest two conclusions:

The Federal Reserve System and the Credit Crisis

The Federal Reserve System struggled to maintain order in U.S. credit markets as rapid declines in home prices led to huge write-downs in the value of mortgage-backed securities held by financial institutions. The Fed could have taken a number of steps—in the mortgage market or through broader regulatory actions—to either preempt or mitigate the impact of this market disruption. Broader regulatory actions—in the mortgage market, of risk taking by financial institutions, or in the form of actions to limit the contagion of crisis—imply fundamental changes at the Fed. The network of actors with a stake in broader regulatory action is powerful and highly resistant to regulatory scrutiny. The statutory mission of the Fed—especially its commitment to stable prices—could be jeopardized by a broad and explicit mandate to provide liquidity to a wide range of vulnerable financial institutions.     

The ruthless Fed: A critique of the AST hypothesis

This paper examines the hypothesis that the Great Contraction was the result of rational rent-seeking by members of the Federal Reserve System. In contrast to the AST hypothesis, evidence on the share prices of member banks that survived the contraction suggests that the owners of these banks suffered an absolute decline in real wealth and a decline relative to a broad spectrum of other investment alternatives. Furthermore, monetary surprises had no statistically discernible effect on the share prices of these banks. This evidence conflicts with the notion that rational rent-seeking would lead the owners of member banks and their bureaucratic conspirators in the Federal Reserve System to unleash a policy with the goal of contracting the money supply by 35 percent.     

Slowing monetary growth since 1984: A public choice explanation

Until about 1984, the U.S. monetary base typically grew at an accelerating rate. Since then, that acceleration has stopped. Modern evidence suggests that the Federal Reserve responds to political pressure. We present empirical evidence supporting the hypothesis that reduced monetary base growth reflects the fact that the political advantages of price inflation have been significantly reduced by the tax indexation provisions of the Economic Recovery Tax Act of 1981.     

Central Bank Independence and Deflation

Deflation presents special challenges to central banking, as traditional monetary policy tools are highly inefficient in dealing with deflationary pressures. In this case, the Federal Reserve must use alternative monetary policy tools that are specially designed to artificially boost asset prices through “printing press” or currency manipulation. Unfortunately, these alternative monetary policy tools create unintended political, geopolitical, and social consequences that overreach into the direct responsibilities of other branches of government. Thus, the government must be able to influence Federal Open Market Committee decisions that potentially affect (or contradict) U.S. foreign policy, U.S. trade policy, U.S. dollar policy, and deliberate domestic/global wealth distribution policies.     

Unconventional monetary policy spillovers: Evidence from India

Many of the studies on the unconventional monetary policy spillover effects concentrated primarily on the policy announcements of the U.S. Federal Reserve. Using a time series approach, with dummies in the event study framework, this study estimates the monetary policy spillover effects of the unconventional monetary policy announcements of the central banks of four major economic regions: the United States, the United Kingdom, European Central bank, and Japan on the asset prices in India. In addition to that, this study estimates the asymmetry in the responses to positive and negative surprise announcements. The study reveals that unconventional monetary surprises do not have any significant impact on the asset prices in India in a narrow time window.     

The Pracademic and the Fed: The Leadership of Chairman Benjamin Bernanke

When President Barack Obama nominated Ben Bernanke for a second term as chair of the Federal Reserve Board in August 2009, he emphasized Bernanke's “bold action and outside‐the‐box thinking” in preventing the recent financial collapse from turning into another Great Depression. While many saw this renomination as providing monetary policy stability and necessary institutional continuity during the crisis, Bernanke's “bold action” has generated robust criticism, mainly because Bernanke initiated fundamental reforms of traditional Fed practices. How has Bernanke's leadership style at the Fed evolved as the financial crisis of 2008–2009 has unfolded? Did his prior academic experience influence his decisions? What are the long‐term implications of Bernanke's innovative strategies for the Federal Reserve as an independent, powerful, policy making institution, traditionally one that possesses tremendous financial and political autonomy? If you want to build a factory, or fix a motorcycle, or set a nation right without getting stuck, then classical, structured, dualistic subject‐object knowledge, although necessary, isn't enough. You have to have some feeling for the quality of the work. You have to have a sense of what's good. That is what carries you forward … It's not just “intuition,” or unexplainable “skill” or “talent.” It's the direct result of contact with basic reality … —Robert M. Pirsig, Zen and the Art of Motorcycle Maintenance There are no atheists in foxholes and no ideologues in financial crises. —Benjamin Bernanke, 2009 ¹ 1 This statement was widely cited in media news outlets from NPR to Face the Nation and the New York Times. See http://www.nytimes.com/2008/09/21/business/21paulson.html .
     

A commentary on “Does the Fed contribute to a political business cycle?”

Abrams and Iossifov (2006) find that during 1957–2004, monetary policy turned significantly more expansionary prior to U.S. presidential elections when the Federal Reserve chairman and the incumbent president belonged to the same political party. However, their long sample period obscures changes in trends during the period stemming from advances in macroeconomic theory and in the implementation of monetary policy. Indeed, when one considers only the Volcker–Greenspan era (1979–2004), there is insufficient evidence to accept the notion of a political business cycle effect.     

Forecast dispersion,dissenting votes,and monetary policy preferences of FOMC members: the role of individual career characteristics and political aspects

Using data from 1992 to 2001, we study the impact of members’ economic forecasts on the probability of casting dissenting votes in the Federal Open Market Committee (FOMC). Employing standard ordered probit techniques, we find that higher individual inflation and real GDP growth forecasts (relative to the committee’s median) significantly increase the probability of dissenting in favor of tighter monetary policy, whereas higher individual unemployment rate forecasts significantly decrease it. Using interaction models, we find that FOMC members with longer careers in government, industry, academia, non-governmental organizations (NGOs), or on the staff of the Board of Governors are more focused on output stabilization, while FOMC members with longer careers in the financial sector or on the staffs of regional Federal Reserve Banks are more focused on inflation stabilization. We also find evidence that politics matters, with Republican appointees being much more focused on inflation stabilization than Democratic appointees. Moreover, during the entire Clinton administration ‘natural’ monetary policy preferences of Bank presidents and Board members for inflation and output stabilization were more pronounced than under periods covering the administrations of both George H.W. Bush and George W. Bush, respectively.     

Political Influences on Monetary Policy 1914–84

This study examines political, institutional and economic influences on monetary policy in the long run. A monetary policy reaction function is estimated, which focuses principally on the influence of the administration, Congress and the Federal Reserve on outcomes; these influences are estimated together with a variety of economic and political controls. The findings show that partisan control of the White House is particularly important in explaining variations in the growth of the quantity of money over time. Republican control of the White House is associated with tighter money, and Democratic control with looser money, but there are exceptions. Finally, the indirect influence of partisanship on the economic variables in the reaction function suggest that the total effects are stronger than the direct effects alone.     

Reliable and unreliable partisan appointees to the Board of Governors

Every new appointment to the Board of Governors in recent years has triggered speculation as to how the new Governor will vote in FOMC meetings. While several studies have hinted at partisan voting behavior by Governors, no study has yet attempted to identify reliable and unreliable partisan voting behavior and to pinpoint the background characteristics of Governors that distinguish between the two. This paper indicates that Board members with a background in economics consistently voted in line with the economic ideology of the appointing President. Noneconomists on the Board, however, displayed no such partisan voting behavior and were seen to be influenced by pressures emanating from the Administration and by the monetary environment prior to their appointment. Over the 1951 to 1987 period, most Presidents have appointed reliable Governors earlier in their Presidential terms (when the returns from being able to influence subsequent monetary policy are great) and have chosen unreliable Governors later in their terms (when election support from the interest groups that these unreliables represent is important).The results of the present paper suggest skepticism toward the recent spate of rational expectations — game-theoretic models which feature a dictatorial policy maker gaming atomistic market participants whose only political activity, voting, generates monetary surprises followed by convergence to an equilibrium. Because of their obsession with the ceremonial formalism of their genre, these models ignore a vast complementary literature and, as a consequence, display conspicuously flimsy institutional and historical premises. Instead, the present paper argues for the greater relevance of models of uncoordinated interaction between multiple political and private principals and Federal Reserve agents.     

A rejoinder to “A commentary on ‘Does the Fed contribute to a political business cycle?’ ”

Jerry Tempelman (Public Choice 132:433–436, 2007) claims that “advances in macroeconomic theory and in the implementation of monetary policy” make discretionary monetary policy preferable to a rules-based system. His supporting evidence is based on the performance of the Fed during the Volcker–Greenspan regimes. His evidence is inappropriate and his conclusion supporting discretion over rules unwarranted.