Academic journal article Contemporary Economic Policy

Outside Influences on Monetary Policy: A Summary of Recent Findings

Academic journal article Contemporary Economic Policy

Outside Influences on Monetary Policy: A Summary of Recent Findings

Article excerpt


In the past three decades, scholarly economics journals and textbooks on money and banking have changed their view of monetary policymakers. During the 1960s, the almost universal view was that monetary policymakers were independent pursuers of a socially optimal set of policies--that is, policies that were independent of private and political pressures. Understandably, this politically cleansed view of the monetary policy process continues to dominate the research agenda of central banks as well as that of the academicians whom they subsidize. This agenda typically focuses on monetary policy as a set of an optimal control/optimal strategy/optimal tactics problems, exclusive of bureaucratic motives or outside pressures. The research program described in this paper, however, suggests that outside pressures play an important and systematic role.

Within the past decade and a half, economists (Kane, 1982) and political scientists (Woolley, 1984; and Kettl, 1986) have developed institutionally realistic treatments of the political economy of monetary policy. They have insisted that monetary policymakers serve a fairly wide array of masters, including politicians in both the executive and legislative branches of government as well as private sector interest groups--especially groups in the financial services industries. However, aside from studies showing that monetary policy reaction functions shift whenever a change in government occurs (Khoury 1990), little hard evidence of systematic outside pressures on monetary policy has been available until recently.

This paper reviews the measurement of these pressures, describes the forces that propel them, and discusses the circumstances under which they affect monetary policy. It also explains how the administration's power to make Federal Reserve appointments is a means of influencing monetary policy.


The executive branch of government systematically signals its policy desires to Fed officials who, in turn, may respond. An index of signaling from the administration to the Federal Reserve (SAFER) measures Executive branch pressures (Havrilesky, 1988). The SAFER index is based on Wall Street Journal articles reporting that a member of the administration desires easier or tighter monetary policy. The premise is that the financial press efficiently captures communication between the executive branch and Federal Reserve officials. An article indicating that a member of the administration has called for monetary ease receives a value of plus one; an article indicating a call for monetary tightness receives a value of minus one.

Havrilesky (1993) extends SAFER forward to 1991 and backward to 1952. The relationship between signaling as a cause and monetary policy as an effect holds across the entire 28 year period from 1964 to 1991. Prior to 1961, administration signaling was rare. After 1969, it was commonplace. This suggests that the 1960s were a watershed in the history of politically induced monetary policy activism. A series of estimation techniques indicate that changes in SAFER result in changes in money growth and in the federal funds rate after about three weeks. Moreover, across the entire sample period, the monetary authority was more responsive to signals from Treasury than from the Council of Economic Advisors or from the Oval Office. Finally, across the entire 1964--1991 timespan, one can identify the subperiods in which monetary policy was responsive to executive branch signaling and the subperiods in which it was not. Using weekly data, Havrilesky (1993), finds that the Federal Reserve was statistically significantly reactive to these pressures (i) when Arthur Burns was Federal Reserve Chairman and Richard Nixon was President (early 1970 to mid 1974), (ii) when Paul Volcker was Chairman and Jimmy Carter was President (1979--1980), and (iii) when Paul Volcker was Chairman during the first Reagan administration (1981--1984). …

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