Hostname: page-component-8448b6f56d-42gr6 Total loading time: 0 Render date: 2024-04-17T23:10:38.327Z Has data issue: false hasContentIssue false
  • English
  • Français

Presidents, Fed chairs, and the deviations from the Taylor rule

Published online by Cambridge University Press:  31 August 2022

Fang-Shuo Chang ,
Shiu-Sheng Chen Open the ORCID record for Shiu-Sheng Chen [Opens in a new window] ,
Tzu-Yu Lin  and
Po-Yuan Wang
Fang-Shuo Chang
Affiliation:
National Taiwan University, Taipei, 10617, Taiwan
Shiu-Sheng Chen*
Affiliation:
National Taiwan University, Taipei, 10617, Taiwan
Tzu-Yu Lin
Affiliation:
National Cheng Kung University, Tainan, Taiwan
Po-Yuan Wang
Affiliation:
National Taiwan University, Taipei, 10617, Taiwan
*
*Corresponding author. E-mail: sschen@ntu.edu.tw
Get access Rights & Permissions [Opens in a new window]

Abstract

This paper examines whether changes in US presidential administration and central bank turnover during the period 1976–2016 caused regime shifts in Taylor rule deviations. Using a dynamic stochastic general equilibrium model to construct the welfare-maximizing policy rule and deviations from the optimal rule, we find evidence that politics indeed play a key role in explaining these deviations. In addition to politics, unemployment rates and the interest rate spread significantly account for regime shifts in Taylor rule deviations.

Keywords

Political changesTaylor rule deviationsoptimal Taylor ruleP26E42E52E58
Type
Articles
Information
Macroeconomic Dynamics , Volume 27 , Issue 6 , September 2023 , pp. 1687 - 1705
Copyright
© The Author(s), 2022. Published by Cambridge University Press

Access options

Get access to the full version of this content by using one of the access options below. (Log in options will check for institutional or personal access. Content may require purchase if you do not have access.)

Footnotes

†

We would like to thank two anonymous referees for comments and suggestions. Any remaining errors are our own.

References

Abrams, B. A. (2006) How Richard Nixon pressured Arthur Burns: Evidence from the Nixon Tapes. Journal of Economic Perspectives 20(4), 177–188.CrossRefGoogle Scholar
Ainsley, C. (2017) The politics of central bank appointments. Journal of Politics 79(4), 1205–1219.CrossRefGoogle Scholar
Andrés, J., Arce, Ó. and Tomas, C.. (2013) Banking competition, collateral constraints, and optimal monetary policy. Journal of Money, Credit and Banking 45(s2), 87–125.CrossRefGoogle Scholar
Bai, J. and Perron, P.. (2003) Computation and analysis of multiple structural change models. Journal of Applied Econometrics 18(1), 1–22.CrossRefGoogle Scholar
Beckmann, J., Belke, A. and Dreger, C.. (2017) The relevance of international spillovers and asymmetric effects in the Taylor rule. The Quarterly Review of Economics and Finance 64(309), 162–170.CrossRefGoogle Scholar
Belke, A. and Potrafke, N.. (2012) Does government ideology matter in monetary policy? A panel data analysis for OECD countries. Journal of International Money and Finance 31(5), 1126–1139.CrossRefGoogle Scholar
Bernanke, B. S. (2015) The Taylor Rule: A Benchmark for Monetary Policy?. Brookings.Google Scholar
Bernanke, B. S., Gertler, M. and Gilchrist, S.. (1999) The Financial Accelerator in a Quantitative Business Cycle Framework, Handbook of Macroeconomics, vol. 1, Part C, pp. 1341–1393, Elsevier.CrossRefGoogle Scholar
Blinder, A. S. (2007) Monetary policy by committee: Why and how? European Journal of Political Economy 23(1), 106–123.CrossRefGoogle Scholar
Blinder, A. S. and Watson, M. W.. (2016) Presidents and the US economy: An econometric exploration. American Economic Review 106(4), 1015–1045.CrossRefGoogle Scholar
Bodea, C. and Hicks, R.. (2015) Price stability and central bank independence: Discipline, credibility, and democratic institutions. International Organization 69(1), 35–61.CrossRefGoogle Scholar
Boettke, P. J. and Smith, D. J.. (2013) Federal reserve independence: A centennial review. Journal of Prices and Markets 1(1), 31–48.Google Scholar
Caporale, T. and Grier, K. B.. (2000) Political regime change and the real interest rate. Journal of Money, Credit and Banking 32(3), 320–334.CrossRefGoogle Scholar
Caporale, T. and Grier, K. B.. (2005a) How smart is my dummy? Time series tests for the influence of politics. Political Analysis 13(1), 77–94.CrossRefGoogle Scholar
Caporale, T. and Grier, K. B.. (2005b) Inflation, presidents, fed chairs, and regime shifts in the U.S. real interest rate. Journal of Money, Credit and Banking 37(6), 1153–1163.CrossRefGoogle Scholar
Chang, F.-S., Chen, S.-S. and Wang, P.-Y.. (2020) Politics and the UK’s Monetary Policy. Scottish Journal of Political Economy 67(5), 486–522.CrossRefGoogle Scholar
Chappell, H. W., McGregor, R. R. and Vermilyea, T.. (2004) Majority rule, consensus building, and the power of the chairman: Arthur Burns and the FOMC. Journal of Money, Credit and Banking 36(3), 407–422.CrossRefGoogle Scholar
Chen, S.-S. and Wang, C.-C.. (2014) Do politics cause regime shifts in monetary policy? Contemporary Economic Policy 32(2), 492–502.CrossRefGoogle Scholar
Clarida, R. H. (2012) What has-and has not- been learned about monetary policy in a low-inflation environment? A review of the 2000s. Journal of Money, Credit and Banking 44(1), 123–140.CrossRefGoogle Scholar
Clark, W. R. and Arel-Bundock, V.. (2013) Independent but not indifferent: Partisan bias in monetary policy at the fed. Economics and Politics 25(1), 1–26.CrossRefGoogle ScholarPubMed
Coibion, O. and Gorodnichenko, Y.. (2012) Why are target interest rate changes so persistent? American Economic Journal: Macroeconomics 4(4), 126–162.Google Scholar
Czudaj, R. L. (2021) Are the forecasts of professionals compatible with the Taylor Rule? Evidence from the euro area. Macroeconomic Dynamics, forthcoming.CrossRefGoogle Scholar
Fernandez-Albertos, J. (2015) The politics of central bank independence. Annual Review of Political Science 18(1), 217–237.CrossRefGoogle Scholar
Fisher, I. (1933) The debt-deflation theory of great depressions. Econometrica 1(4), 337–357.CrossRefGoogle Scholar
Franzese, R. J. (1999) Partially independent central banks, politically responsive governments, and inflation. American Journal of Political Science 43(3), 681–706.CrossRefGoogle Scholar
Friedman, M. (1982) Monetary policy: Theory and practice. Journal of Money, Credit and Banking 14(1), 98–118.CrossRefGoogle Scholar
Hakes, D. R. (1990) The objectives and priorities of monetary policy under different federal reserve chairmen. Journal of Money, Credit and Banking 22(3), 327–337.CrossRefGoogle Scholar
Hellerstein, R. (2007) Is there a dead spot? New evidence on FOMC decisions before elections. Journal of Money, Credit and Banking 39(6), 1411–1427.CrossRefGoogle Scholar
Hetzel, R. L. (2008) The Monetary Policy of the Federal Reserve: A History, Cambridge University Press.CrossRefGoogle Scholar
Hibbs, D. A. (1977) Political parties and macroeconomic policy. American Political Science Review 71(4), 1467–1487.CrossRefGoogle Scholar
Hudson, K. B. and Vespignani, J.. (2018) Understanding the deviation of Australian policy rate from the Taylor rule. Applied Economics 50(9), 973–989.CrossRefGoogle Scholar
Iacoviello, M. and Neri, S.. (2010) Housing market spillovers: Evidence from an estimated DSGE model. American Economic Journal: Macroeconomics 2(2), 125–164.Google Scholar
James, H. (2010). Central Banks: Between Internationalisation and Domestic Political Control, BIS Working Papers 327, Bank for International Settlements. http://www.bis.org/publ/work327.htm,Google Scholar
Jeske, K. and Liu, Z.. (2013) Should the central bank be concerned about housing prices? Macroeconomic Dynamics 17(1), 29–53.CrossRefGoogle Scholar
Kahn, G. A. (2012) The Taylor Rule and the Practice of Central Banking. In: Kahn, G. A. (eds.), The Taylor Rule and the Transformation of Monetary Policy, pp. 63–102, Hoover Institution Press.Google Scholar
Keefer, P. and Stasavage, D.. (2003) The limits of delegation: Veto players, central bank independence, and the credibility of monetary policy. American Political Science Review 97(3), 407–423.CrossRefGoogle Scholar
Knotek, E. S., Randal, V., Christian, G., Caitlin, T. and Saeed, Z. (2016) Federal Funds Rates Based on Seven Simple Monetary Policy Rules, Economic Commentary, Federal Reserve Bank of Cleveland Google Scholar
Kozicki, S. and Tinsley, P. A.. (2006) Minding the gap: Central bank estimates of the unemployment natural rate. Computational Economics 27(2-3), 295–327.CrossRefGoogle Scholar
Lambertini, L., Mendicino, C. and Punzi, M. T.. (2013) Leaning against boom–bust cycles in credit and housing prices. Journal of Economic Dynamics and Control 37(8), 1500–1522.CrossRefGoogle Scholar
Laubach, T. and Williams, J. C.. (2003) Measuring the natural rate of interest. Review of Economics and Statistics 85(4), 1063–1070.CrossRefGoogle Scholar
Lei, X. and Tseng, M. C.. (2019) Wait-and-see monetary policy. Macroeconomic Dynamics 23(5), 1793–1814.CrossRefGoogle Scholar
Madeira, J. and Palma, N.. (2018) Measuring monetary policy deviations from the Taylor rule. Economics Letters 168(1), 25–27.CrossRefGoogle Scholar
Maggio, M. D. and Kacperczyk, M.. (2017) The unintended consequences of the zero lower bound policy. Journal of Financial Economics 123(1), 59–80.CrossRefGoogle Scholar
Mendicino, C. and Pescatori, A.. (2008) Credit Frictions, Housing Prices, and Optimal Monetary Policy Rules. Bank of Canada, Working paper,Google Scholar
Meyer, L. H. (2004) A Term at the Fed: An Insider’s View, Harper Business.Google Scholar
Morris, I. L. (2002) Congress, the President, and the Federal Reserve: The Politics of American Monetary Policy-Making. University of Michigan Press.Google Scholar
Nikolsko-Rzhevskyy, A., Papell, D. H. and Prodan, R.. (2014) Deviations from rules-based policy and their effects. Journal of Economic Dynamics and Control 49(C), 4–17.CrossRefGoogle Scholar
Nikolsko-Rzhevskyy, A., Papell, D. H. and Prodan, R.. (2019) The Taylor principles. Journal of Macroeconomics 62(November), 103159.CrossRefGoogle Scholar
Orphanides, A. (2003) Historical monetary policy analysis and the Taylor rule. Journal of Monetary Economics 50(5), 983–1022.CrossRefGoogle Scholar
Potrafke, N. (2018) Government ideology and economic policy-making in the United States: A survey. Public Choice 174(1-2), 145–207.CrossRefGoogle Scholar
Rajan, R. G. (2006) Has financial development made the world riskier? European Financial Management 12(4), 499–533.CrossRefGoogle Scholar
Rapach, D. E. and Wohar, M. E.. (2005) Regime changes in international real interest rates: Are they a monetary phenomenon? Journal of Money, Credit and Banking 37(5), 887–906.CrossRefGoogle Scholar
Rubio, M. (2011) Fixed- And variable-rate mortgages, business cycles, and monetary policy. Journal of Money, Credit and Banking 43(4), 657–688.CrossRefGoogle Scholar
Rubio, M. (2020) Monetary policy, credit markets, and banks: A DSGE perspective. Economics Letters 195(6), 109481.CrossRefGoogle Scholar
Rubio, M. and Carrasco-Gallego, J. A.. (2015) Macroprudential and monetary policy rules: A welfare analysis. The Manchester School 83(2), 127–152.CrossRefGoogle Scholar
Schmitt-Grohé, S. and Uribe, M. D.. (2010) Liquidity Traps: An Interest-rate-based Exit Strategy, NBER Working Paper No. 16514,CrossRefGoogle Scholar
Schmitt-Grohé, S. and Uribe, M. D.. (2007) Optimal simple and implementable monetary and fiscal rules. Journal of Monetary Economics 54(6), 1702–1725.CrossRefGoogle Scholar
Smets, F. and Wouters, R.. (2007) Shocks and frictions in US business cycles: A Bayesian DSGE approach. American Economic Review 97(3), 586–606.CrossRefGoogle Scholar
Svensson, L. E. O. (2003) What is wrong with Taylor rules? Using judgment in monetary policy through targeting rules. Journal of Economic Literature 41(2), 426–477.CrossRefGoogle Scholar
Taylor, J. B. (1993) Discretion versus policy rules in practice. Carnegie-Rochester Conference Series on Public Policy 39(1), 195–214.CrossRefGoogle Scholar
Taylor, J. B. (2015) Monetary rules work better than constrained discretion. The Wall Street Journal.Google Scholar
Weintraub, R. E. (1978) Congressional supervision of monetary policy. Journal of Monetary Economics 4(2), 341–362.CrossRefGoogle Scholar
Woodford, M. (2012) Inflation targeting and financial stability. Sveriges Riksbank Economic Review 1, 7–32.Google Scholar