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Does Partisan Heritage Matter? The Case of the Federal Reserve

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  • Dino Falaschetti
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    Abstract

    Received evidence suggests that changes in appointer- and overseer- preferences influence monetary policy (i.e., partisan heritage matters). Evidence presented here, on the other hand, is consistent with changes in the cost of pursuing a common preference influencing policy. I draw this evidence from a panel of Federal Open Market Committee (FOMC) votes and find support for the following conclusions. 1. Federal Reserve Board (FRB) governors who were nominated and confirmed by the same party (Republican or Democrat) prefer significantly looser policy than do other FOMC members. 2. Monetary policy is significantly looser when either party controls the oversight mechanism (i.e., the presidency and Senate) than when control is split. 3. Oversight acts less forcefully on district bank presidents than on FRB governors. In short, the present evidence suggests that political agents from both parties prefer loose money and pursue this preference more efficiently when their parties are aligned.

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    File URL: http://128.118.178.162/eps/mic/papers/0311/0311003.pdf
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    Bibliographic Info

    Paper provided by EconWPA in its series Microeconomics with number 0311003.

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    Length: 23 pages
    Date of creation: 16 Nov 2003
    Date of revision:
    Handle: RePEc:wpa:wuwpmi:0311003

    Note: Type of Document - pdf; prepared on WinXP; pages: 23
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    Web page: http://128.118.178.162

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    Keywords: Federal Reserve; Appointments; Oversight;

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    1. Chappell, Henry W, Jr & Havrilesky, Thomas M & McGregor, Rob Roy, 1993. "Partisan Monetary Policies: Presidential Influence through the Power of Appointment," The Quarterly Journal of Economics, MIT Press, vol. 108(1), pages 185-218, February.
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    7. Keech, William R. & Morris, Irwin L., 1997. "Appointments, Presidential Power, and the Federal Reserve," Journal of Macroeconomics, Elsevier, vol. 19(2), pages 253-267, April.
    8. Friedman, Milton, 1982. "Monetary Policy: Theory and Practice," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 14(1), pages 98-118, February.
    9. Caporale, Tony & Grier, Kevin B, 1998. "A Political Model of Monetary Policy with Application to the Real Fed Funds Rate," Journal of Law and Economics, University of Chicago Press, vol. 41(2), pages 409-28, October.
    10. Kydland, Finn E & Prescott, Edward C, 1977. "Rules Rather Than Discretion: The Inconsistency of Optimal Plans," Journal of Political Economy, University of Chicago Press, vol. 85(3), pages 473-91, June.
    11. W. J. Henisz, 2000. "The Institutional Environment for Economic Growth," Economics and Politics, Wiley Blackwell, vol. 12(1), pages 1-31, 03.
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