Central bank independence and political pressure in the Greenspan era

Gerard Kuper and Jan Hessel Veurink
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Jan Hessel Veurink: University of Groningen

No 14020-EEF, Research Report from University of Groningen, Research Institute SOM (Systems, Organisations and Management)

Abstract: This paper investigates whether political pressure from incumbentpresidents influences the Fed’s monetary policy during the period that Alan Greenspan was the chairman of the United States Federal Reserve Board. A modified Taylor rule - featuring the inflation rate and the unemploymentgap rather than the output gap - with time-varying coefficients will be used to test well-known political-economic theories of Nordhaus (1975) and Hibbs (1987). This novel approach addresses some of the disadvantages of Ordinary Least Squares, and has the additional benefit of allowing the use of mixed frequency data. Our findings suggest that the Fed under Greenspan did not create election driven monetary cycles, but was less inflation averswith a Democratic president.

Date: 2014
New Economics Papers: this item is included in nep-cba, nep-mon and nep-pol
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