Did the fed raise interest rates before elections?
The literature on political business cycles focuses on elected incumbents and neglects the incentives of appointed officials. We present evidence of rate hikes before elections when the chair of the US Federal Reserve is from a different party than the incumbent president. This finding contrasts with the traditional belief that an inappropriate policy-rate bias implies a more expansive pre-election policy stance. We also find weak evidence that rates are lowered when the chair and president are from the same party. The evidence that ideological preferences of the chair matter remains even when we control for career motives.
KeywordsPolitical business cycle Political monetary cycle Central bank independence Political appointments Taylor rule
JEL ClassificationE32 E58 E61
The author declares that he has no conflict of interest. The views expressed in this paper are those of the author and do not necessarily reflect those of any affiliated institution(s). We thank three anonymous referees for their helpful suggestions. We are particular grateful for the support by Kenzo Rojo.
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