Does Partisan Heritage Matter? The Case of the Federal Reserve

Abstract

Received evidence suggests that changes in appointer- and overseer-preferences influence monetary policy (i.e., partisan heritage matters). Evidence presented here, on the other hand, is consistent with changes in the cost of pursuing a common preference influencing policy. I draw this evidence from a panel of Federal Open Market Committee (FOMC) votes and find support for the following conclusions.

1. Federal Reserve Board (FRB) governors who were nominated and confirmed by the same party (Republican or Democrat) prefer significantly looser policy than do other FOMC members.

2. Monetary policy is significantly looser when either party controls the oversight mechanism (i.e., the presidency and Senate) than when control is split.

3. Oversight acts less forcefully on district bank presidents than on FRB governors.

In short, the present evidence suggests that political agents from both parties prefer loose money and pursue this preference more efficiently when their parties are aligned.

Keywords: collective action, credible commitment, monetary policy

JEL Classification: D7, E5