The depoliticization of monetary policy: a contemporary test of persistent myths

Business Economics, April, 2008 by Jerry H. Tempelman

1. Political Party Bias

According to the claim of political party bias, Republicans tend to favor relatively restrictive monetary policy while Democrats favor relatively accommodative monetary policy. Arguably, this claim flows from the traditional stereotype that Republicans disproportionately represent the owners of capital, who constitute the creditor classes, while Democrats represent the providers of labor, who in aggregate tend to be net debtors. In the short term, inflation benefits debtors and hurts creditors. Thus, Republicans have historically been thought of as the sound-money party, while Democrats have been thought of as placing more emphasis on the achievement of full employment.

A standard methodology to demonstrate the empirical validity of the application of this claim to monetary policy has been to analyze the voting record of monetary policy decisions by the FOMC and to classify the direction of dissenting votes of Federal Reserve governors by the political party of the presidents who appointed them. Note that this type of analysis is not quite as cynical as may at first appear. Although governors are not selected for their willingness to promote a political agenda, presidents tend to appoint governors whose professional convictions are consistent with the presidents' political agendas.

One of the most comprehensive of these analyses was performed by Puckett (1984). Using the Annual Reports of the Board of Governors of the Federal Reserve System, Puckett examined the voting record of each FOMC meeting during the 23-year period from 1959 through 1981. (4) Tabulating each recorded vote, Puckett found a total of 3,822 votes, including 248 dissents, cast over a period of 23 years. He classified dissents as either "easier" or "tighter" relative to the consensus vote on the directive, with easy and tight defined in terms of the Committee's choice of policy instrument (whether monetary aggregates, money market conditions, etc).

Puckett's underlying assumption was that "dissents were generated by a Bernoulli process, that is, by a process like flipping a coin--tighter dissents on one side, easier on the other" (p. 98). His null hypothesis was that easier and tighter dissent votes were equally likely. His large sample size and independent trials made testing relatively straightforward.

Among Puckett's conclusions was that "on balance, governors appointed by Democratic U.S. presidents dissented significantly on the easier side, while governors appointed by Republican U.S. presidents dissented significantly on the tighter side" (p. 97). This conclusion is consistent with similar findings by, among others, Beck (1984), Woolley (1984), Hibbs (1987), Alesina and Sachs (1988), Grier (1991), Havrilesky and Gildea (1995), and Chappell et al. (2005, pp. 48-49).

I replicated Puckett's methodology for the 25-year sample period that followed his: 1982-2006. Like Puckett, I tabulated all FOMC votes cast during that period, distinguishing only the direction of dissent and not the magnitude. (5) My sample period includes a total of 200 voting occasions (regularly scheduled meetings occurred eight times per year)6 on which a total of 2,229 votes were cast by 68 individuals, including 1,231 votes cast by 31 governors. Of these, 66 were dissenting votes, a proportion (5.4 percent) that is comparable to that found by Puckett during his sample period (6.3 percent).