The Fed and the Political Business Cycle

Research output: Contribution to journalArticle

Abstract

This study asks whether the Federal Reserve has actively made monetary policy so as to aid the president's reelection. Using Shiller's smoothness “prior” to estimate the shape of cycles, the study finds a political business cycle in unemployment and a preelection increase in growth of the money supply. But the timing of these two cycles is inconsistent. Furthermore, little evidence exists of a cycle in the instruments of monetary policy. Thus, the Fed is not actively creating a political business cycle. Apparently, movements in real money that are not caused—but are not offset—by the Fed are an important cause of the political business cycle. Elections influence Fed behavior. Monetary tightness occurs early in a presidential term, before reelection incentives become critical. This is due to the Fed's political weakness. Thus, the Fed's independence only partly insulates it from electoral pressures.

Original languageEnglish (US)
Pages (from-to)25-38
Number of pages14
JournalContemporary Economic Policy
Volume9
Issue number2
DOIs
StatePublished - Apr 1991

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business cycle
monetary policy
money supply
unemployment
money
president
election
incentive
cause
evidence
Political business cycles
Monetary policy

ASJC Scopus subject areas

  • Business, Management and Accounting(all)
  • Economics and Econometrics
  • Public Administration

Cite this

The Fed and the Political Business Cycle. / Beck, Nathaniel.

In: Contemporary Economic Policy, Vol. 9, No. 2, 04.1991, p. 25-38.

Research output: Contribution to journalArticle

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