A0343
Title: Estimating the effects of political influence on the Fed: A narrative approach with new data
Authors: Thomas Drechsel - University of Maryland (United States) [presenting]
Abstract: Novel data and a narrative identification strategy are combined to isolate exogenous shifts in political influence on the Federal Reserve and quantify their macroeconomic effects. A data set with detailed information on personal interactions between U.S. Presidents and Fed officials is built, from Franklin D. Roosevelt to George W. Bush. While personal interactions endogenously respond to economic conditions, a narrative approach is used to identify a shift in interactions that plausibly originates for purely political reasons: in his desire to be re-elected, Richard Nixon arguably convinced Arthur Burns to ease monetary policy in 1971. Exploiting this episode as a narrative sign restriction in an SVAR estimated over the 1933-2008 period, it is found that political influence shocks (i) increase inflation, economic activity, government spending and the deficit, (ii) are much more inflationary than traditional monetary policy shocks scaled to the same interest rate change, (iii) contribute to some other inflationary episodes outside of the Nixon era. Additional evidence from recent interactions between Treasury Secretaries and Fed officials suggests that there is meaningful variation in interactions between politicians and the Fed also during recent administrations. While the benefits of central bank independence are often highlighted using cross-country data, supporting evidence is provided from one economy through time.
