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Further Evidence Concerning Expense Preference and the Fed

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  • Mester, Loretta J

Abstract

This paper presents further evidence on the existence of expense-preference behavior toward labor in the Federal Reserve System over the period 1954-89. I expand on a model of Fed behavior presented in Boyes, Mounts, and Sowell (1988) (hereafter BMS). BMS's results suggested that the Fed indulged in expense preference. However, one of the assumptions of their model was that the Fed uses a Cobb-Douglas production structure. This paper shows that the data reject the hypothesis that the Fed uses a Cobb-Douglas production structure. Further analysis using the test developed in Mester (1989), which permits a less restrictive production technology, suggests that the Fed did not indulge in expense-preference behavior over the sample period. Copyright 1994 by Ohio State University Press.

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  • Mester, Loretta J, 1994. "Further Evidence Concerning Expense Preference and the Fed," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 26(1), pages 125-145, February.
    • Handle: RePEc:mcb:jmoncb:v:26:y:1994:i:1:p:125-45
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    1. Loretta J. Mester, 2003. "Applying efficiency measurement techniques to central banks," Working Papers 03-13, Federal Reserve Bank of Philadelphia.

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