The Federal Reserve May Be Politically ... - Pluto Huji Ac Il

Figure 2: Hypothesized link between interest rates and the electoral calendar
Interest
rate
Republican
Democrat
CBI
No CBI
Electoralist Partisan
Election proximity
Strategic central banker
(a) (b) (c)
of Figure 2). If the central bank is a neutral ination hawk, then partisan differences
in interests ought to remain, though at a lower rate reecting the unconditional in-
uence of an independent central bank (dashed lines in Panel (b) of Figure 2). Our
model, however, predicts a relationship between the electoral calendar and interest
rates under central bank independence that is distinct from both of these alternatives.
If the central bank is actively engaged in supporting the electoral and re-electoral efforts
of right-wing parties interest rates ought to decrease as elections draw near, if
right-wing parties control the government, but when le-wing parties are in power
interest rates may be seen to increase as elections draw near (dashed lines in Panel
(c) of Figure 2 ). In contrast, in the absence of central bank independence, our model
predicts the same behavior as the traditional PBC model does (solid lines in Panel
(c) Figure 2). In this section, we use data on the Federal Funds Rate to evaluate this
claim.
Figure 3 plots the evolution of the Federal Funds Rate (FFR) against the electoral
cycle across all presidential administrations since Eisenhower’s rst term in office. 3
e difference between the Democrat and the Republican plots is striking. For every
Democratic term in office, the interest rate path ends at a higher level than it started.
For every Republican president’s term, it ends at a lower rate than it started. Figure 4
tells the same story. e Federal funds rate climbs during each Democratic administration
and falls, oen precipitously, before Republican incumbents come up for
3 Data on the FFR were obtained from the FRED database, published by the St.Louis Fed.
8