TheDepoliticization of Monetary Policy

A Contemporary Test Of Persistent Myths

By Jerry H. Tempelman

Jerry H. Tempelman is the high-yield portfolio manager for Intrepid Capital Management.1 He holds the Chartered Financial Analyst designation and is a member of the CFA Institute, the American Finance Association, and the American Economic Association. His writings on monetary policy, fiscal policy and financial economics have appeared in a number of journals and periodicals. He received his education at Boston University and at Erasmus University Rotterdam in the Netherlands. [Editor’s note: After this article was submitted and accepted for publication by Business Economics, Mr. Tempelman took a position with the Federal Reserve Bank of New York. The views expressed are strictly those of the author and do not necessarily reflect the position of the Federal Reserve Bank of New York or the Federal Reserve System.]

In the past thirty years, it has been claimed that Republicans tend to favor relatively restrictive monetary policy while Democrats favor relatively accommodative monetary policy. Another claim is that, regardless of which political party is in power, monetary policy tends to be relatively restrictive during the first two years of an administration and relatively accommodative during its final two years. The present paper finds an absence of empirical evidence supporting either claim by restricting the sample period to the past quarter century (1982–2006). The depoliticization of monetary policy decisions probably reflects, among other factors, both the post-1970s new- Keynesian consensus in macroeconomic theory and the realization of political independence of the Federal Reserve System during the Volcker-Greenspan years.

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JEL Code: E52