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

Business Economics, April, 2008 by Jerry H. Tempelman

Classifying governors by the political party of the U.S. president who appointed them, their dissenting votes can be broken down as indicated in Table 1. (7)

TABLE 1

DISSENTING VOTES BY GOVERNORS 1982-2006

        E   T  Total

D      8   3      11
R      29  26     55
Total  37  29     66

E = easier, T = tighter D = Democratic, R = Republican

It is irrelevant for our purposes whether dissents are "easier" cast by Democratic-appointed governors or "tighter" cast by Republican-appointed governors. Instead, we are trying to distinguish between "easier" dissent votes cast by Democratic-appointed governors or "tighter" dissent votes cast by Republican-appointed governors on the one hand, and "easier" dissent votes cast by Republican-appointed governors or "tighter" dissent votes cast by Democratic-appointed governors on the other. This reduces our analysis to a straightforward binomial probability problem. If we follow Puckett's assumption that dissenting votes are generated by a Bernoulli process, we can test the null hypothesis that the total number in the T/R and E/D cells is random, or p = 0.5 for n = 66. Because np > 10 and n(l -p) > 10, we can perform a straightforward one-proportion z-test, in which

z=[p-p]/[square root of (p(1-p)/n]

with p = (8 26)/66 = .515. Solving for z we find z = .246, which is not anywhere near the level required to reject the null hypothesis with any reasonable degree of confidence. Thus, for the period 1982-2006, or the most recent quarter century, we find insufficient evidence to conclude that there was a correlation between the direction of dissenting votes and the political party with which dissenting governors were affiliated.

2. Political Monetary Cycle Theories

According to the second claim, incumbent government officials try to influence the outcome of upcoming elections via the conduct of economic policy. Specifically, the claim is that economic policy tends to be relatively restrictive during the first two years of an administration and relatively expansive during the final two years of an administration, regardless of which political party occupies the White House.

This claim has been advanced in several different variations. Nordhaus (1975) examined unemployment and inflation data, finding a pattern he dubbed political business cycle (PBC). Others (e.g., Tufte [1978, pp. 47-52], Meiselman [1986], and Grier [1987, 1989]) have examined monetary growth data, finding election-cycle patterns they dubbed political monetary cycle (PMC). More recently, Abrams and Iossifov (2006) have analyzed implicit deviations from a theoretical federal funds target rate that is the outcome of a model that uses various Taylor rules based on deviations from an implicit inflation target and the output gap. They find a cyclical pattern only when the Federal Reserve chairman and the incumbent president belonged to the same political party (see also Jonsson, 1997). Along the way, such claims have spread beyond academia and have come to be mentioned in books on the Federal Reserve intended for a more general audience such as Greider (1989, pp. 213-215) or Mayer (2002, p. 187).

One major methodological problem with some of these analyses is that they assume that the measured data are indeed controlled by the policymakers. In reality, however, the actual data may not always reflect the policymakers' intent. To try and avoid this methodological shortcoming, I considered the FOMC's intent in setting monetary policy, as captured by the same policy record used in the previous analysis, namely the policy statements, minutes, and transcripts of FOMC meetings along with the explicit record of actual changes in the federal funds target rate. Examining the same 25-year sample period I used in my earlier analysis, 1982-2006, I find the results summarized in Table 2. (8)