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Political Monetary Cycles Under Alternative Institutions: The Independent Treasury And The Federal Reserve

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  • Jac C. Heckelman
  • John H. Wood

Abstract

The theory of opportunistic political business cycles predicts incumbent politicians will alter their economic policies to spur short-run growth to attract additional votes for the upcoming election. There has not been much emphasis on the possibility of historical political business cycles prior to the Keynesian Revolution. No study has yet undertaken a systematic approach to testing for policy cycles during this period. Our study will bridge this gap by considering cycles in monetary policy for the periods of 1879-1914 until the start of Fed operations, and 1914-1932 until abandonment of the gold standard. To properly test for political cycles, it is necessary to develop reaction functions for the Treasury and compare against the reaction function later held by the Fed. This also reveals that creation of an independent monetary authority to be insulated from political pressures changed the manner in which policy was directed, aside from political issues. The evidence is not consistent, however, with monetary cycles closely tied to electoral concerns. Copyright Blackwell Publishing Ltd 2005.

Suggested Citation

  • Jac C. Heckelman & John H. Wood, 2005. "Political Monetary Cycles Under Alternative Institutions: The Independent Treasury And The Federal Reserve," Economics and Politics, Wiley Blackwell, vol. 17(3), pages 331-350, November.
  • Handle: RePEc:bla:ecopol:v:17:y:2005:i:3:p:331-350
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    References listed on IDEAS

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    1. Eichengreen, Barry, 1996. "Golden Fetters: The Gold Standard and the Great Depression, 1919-1939," OUP Catalogue, Oxford University Press, number 9780195101133.
    2. Wood,John H., 2005. "A History of Central Banking in Great Britain and the United States," Cambridge Books, Cambridge University Press, number 9780521850131, April.
    3. Alberto Alesina & Nouriel Roubini & Gerald D. Cohen, 1997. "Political Cycles and the Macroeconomy," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262510944, January.
    4. Philip Cagan, 1965. "Determinants and Effects of Changes in the Stock of Money, 1875–1960," NBER Books, National Bureau of Economic Research, Inc, number caga65-1, June.
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    Cited by:

    1. Anderson, Hamish D. & Malone, Christopher B. & Marshall, Ben R., 2008. "Investment returns under right- and left-wing governments in Australasia," Pacific-Basin Finance Journal, Elsevier, vol. 16(3), pages 252-267, June.
    2. Aidt, Toke & Asatryan, Zareh & Badalyan, Lusine & Heinemann, Friedrich, 2015. "Vote buying or (political) business (cycles) as usual?," ZEW Discussion Papers 15-017, ZEW - Zentrum für Europäische Wirtschaftsforschung / Center for European Economic Research.

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