Independent but Not Completely Unbiased: How the Fed’s Monetary Policy Reacts to Political Budget Cycles
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2023-07-06
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en
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In this paper, it is investigated how the Federal Reserve’s monetary policy reacts to opportunistic political budget cycles caused by both gubernatorial and presidential elections in the United States between 1960 and 2008. The effect of a similar or different political affiliation of the incumbent and the Fed chairman on the Federal Funds Rate was analysed. It was found that the Federal Reserve reacts independently to gubernatorial elections but is not politically unbiased. The Federal Funds Rate was increased in the case of a different political affiliation and not in the case of a similar political affiliation, meaning that the re-election chances of incumbent state governors with a different political affiliation were decreased and those of incumbent state governors with a similar political affiliation were not. This effect was mainly driven by states with the largest population. Moreover, there was weak evidence that the Fed decreases the Federal Funds Rate before presidential elections, independent of the political affiliation of the incumbent president, increasing his/her re-election chances. However, this result was too weak and too close to the Taylor rule to conclude that the Fed reacts non-independently to presidential elections.
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Faculteit der Managementwetenschappen