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Political Monetary Cycles Under Alternative Institutions: The Independent Treasury And The Federal Reserve

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  • Jac C. Heckelman
  • John H. Wood

Abstract

The theory of opportunistic political business cycles predicts incumbent politicians will alter their economic policies to spur short‐run growth to attract additional votes for the upcoming election. There has not been much emphasis on the possibility of historical political business cycles prior to the Keynesian Revolution. No study has yet undertaken a systematic approach to testing for policy cycles during this period. Our study will bridge this gap by considering cycles in monetary policy for the periods of 1879–1914 until the start of Fed operations, and 1914–1932 until abandonment of the gold standard. To properly test for political cycles, it is necessary to develop reaction functions for the Treasury and compare against the reaction function later held by the Fed. This also reveals that creation of an independent monetary authority to be insulated from political pressures changed the manner in which policy was directed, aside from political issues. The evidence is not consistent, however, with monetary cycles closely tied to electoral concerns.

Suggested Citation

  • Jac C. Heckelman & John H. Wood, 2005. "Political Monetary Cycles Under Alternative Institutions: The Independent Treasury And The Federal Reserve," Economics and Politics, Wiley Blackwell, vol. 17(3), pages 331-350, November.
  • Handle: RePEc:bla:ecopol:v:17:y:2005:i:3:p:331-350
    DOI: 10.1111/j.0954-1985.2005.00156.x
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    References listed on IDEAS

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    Cited by:

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    3. Bismark Aha & David.M Higgins & Timothy Lee, 2018. "UK Political Cycle and the Effect on National House Prices: An Exploratory Study," ERES eres2018_60, European Real Estate Society (ERES).

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