Estimating the effects of political pressure on the Fed : a narrative approach with new data

Author / Creator

Drechsel, Thomas, author

Available as

Online

Summary

This paper combines new data and a narrative approach to identify shocks to political pressure on the Federal Reserve. From archival records, I build a data set of personal interactions between U.S...

This paper combines new data and a narrative approach to identify shocks to political pressure on the Federal Reserve. From archival records, I build a data set of personal interactions between U.S. Presidents and Fed officials between 1933 and 2016. Since personal interactions do not necessarily reflect political interference and can arise endogenously, I develop a narrative identification strategy. To help his re-election, President Nixon pressured Fed Chair Burns to ease monetary policy 1971. I exploit this episode through restrictions on a structural vector autoregression that includes the personal interaction data and standard macro data. I find that political pressure shocks (i) increase inflation strongly and persistently, (ii) lead to statistically weak negative effects on activity, (iii) contributed to other inflationary episodes outside of the Nixon era, and (iv) transmit differently from standard expansionary monetary policy shocks, in particular by having a stronger effect on inflation expectations. While the role of central bank independence has previously been studied using cross-country data, my estimates cover one economy through time and are quantitative: increasing political pressure by half as much as Nixon, for six months, raises the U.S. price level by more than 8%.

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