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Political Compromise and Bureaucratic Structure: The Political Origins of the Federal Reserve System

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  • Andrew C. Sobel

Abstract

What is the origin of the structural independence of the Federal Reserve System? Unlike existing explanations on central bank independence, we show that the structural independence of the Fed is not the result of intentional design but a product of compromise among disparate groups. Using agenda-constrained ideal point estimation techniques to estimate both the preferences of senators on key questions of Fed structure and the locations of alternative forms of the bill with respect to those preferences, we show that the structural features of the Fed in the final bill differed markedly from the original preferences of legislators representing competing groups. The result was a compromise that offered the prospect of significant independence for the new agency. The Fed case shows that political compromise can provide useful bureaucratic insulation when the short-term incentives of political principals promote unstable, self-seeking policy choices (JEL N41, N21). The Author 2008. Published by Oxford University Press on behalf of Yale University. All rights reserved. For permissions, please email: journals.permissions@oxfordjournals.org, Oxford University Press.

Suggested Citation

  • Andrew C. Sobel, 2009. "Political Compromise and Bureaucratic Structure: The Political Origins of the Federal Reserve System," Journal of Law, Economics, and Organization, Oxford University Press, vol. 25(2), pages 472-498, October.
  • Handle: RePEc:oup:jleorg:v:25:y:2009:i:2:p:472-498
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    File URL: http://hdl.handle.net/10.1093/jleo/ewn010
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    References listed on IDEAS

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    1. Kugler, Maurice & Verdier, Thierry & Zenou, Yves, 2005. "Organized crime, corruption and punishment," Journal of Public Economics, Elsevier, vol. 89(9-10), pages 1639-1663, September.
    2. Mishra, Ajit, 2002. "Hierarchies, incentives and collusion in a model of enforcement," Journal of Economic Behavior & Organization, Elsevier, vol. 47(2), pages 165-178, February.
    3. Hindriks, Jean & Keen, Michael & Muthoo, Abhinay, 1999. "Corruption, extortion and evasion," Journal of Public Economics, Elsevier, vol. 74(3), pages 395-430, December.
    4. Kessler, Anke S., 2000. "On Monitoring and Collusion in Hierarchies," Journal of Economic Theory, Elsevier, vol. 91(2), pages 280-291, April.
    5. Paolo Mauro, 1995. "Corruption and Growth," The Quarterly Journal of Economics, Oxford University Press, vol. 110(3), pages 681-712.
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    More about this item

    JEL classification:

    • N41 - Economic History - - Government, War, Law, International Relations, and Regulation - - - U.S.; Canada: Pre-1913
    • N21 - Economic History - - Financial Markets and Institutions - - - U.S.; Canada: Pre-1913

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