Monetary Policy Signaling from the Administration to the Federal Reserve
This Chapter employs the index of monetary policy signaling from the Administration to the Federal Reserve (SAFER) that was developed in Chapter Two. The SAFER index is a simple weekly sum of articles that appeared in the Wall Street Journal in which Administration officials expressed a desire for easier (+1) or tighter (−1) monetary policy. A key assumption is that systematically over time the financial media capture the essence of communication that is going on between the executive branch and Federal Reserve officials.1 The signaling index is employed in ordinary least squares regressions for the period from January 1964 to November 1991. Cumulative values of the SAFER index over a three-week period, as an explanatory variable, are found to have a statistically significant effect on the average Federal funds rate during the third week, as the dependent variable. Further evidence suggests that the SAFER index is Granger-causal with respect to the Federal funds rate. After classifying the signals by sources within the Administration (Oval Office, Council of Economic Advisers, Treasury and other and unidentified sources), it is shown that, for the overall 1964–1991 period, signals from the Treasury Department and from other and unidentified sources have a statistically significant effect on the Federal funds rate while signals from the Oval Office and the Council do not. When the data are segmented according to who was the Chairman of the Federal Reserve Board at the time ordinary least squares results indicate that the Federal Reserve did not systematically respond to executive branch signaling in a statistically significant way when William McChesney Martin, G. William Miller, and Alan Greenspan were Chairmen but did respond statistically significantly to Administration signaling during portions of the periods during which Arthur Burns and Paul Volcker were Chairmen.
KeywordsMonetary Policy Federal Reserve Reaction Function Monetary Authority Fund Rate
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