Partisan politics and Fed policy choices: A Taylor rule approach

Abstract

How do the President and the Congress affect the policy choices of the Federal Open Market Committee, the primary policymaking arm of the Federal Reserve System (the Fed)? I draw on a commonly used tool for estimating the sensitivity of Fed responses to output and inflation - the Taylor rule - to learn about the politics of monetary policy. Does the Fed respond more aggressively to inflation under a Republican President or if a Republican majority controls Congress? Does the Fed respond to recession sooner and with lower interest rates if the President is a Democrat? The results indicate that the ideology of the pivotal legislator influences monetary policy choices, rather than the President alone, appointments to the Board, or the Board chair. The Fed is more responsive to inflation when Republicans control the White House and the Congress.