Central-Bank-Independence | Macro Paper Warehouse

Central Bank Independence at Low Interest Rates

Mon, 01 Jan 0001 00:00:00 +0000

This paper constructs a new measure of political pressure on the Federal Reserve from textual analysis of Fed Chairs’ testimonies at Humphrey-Hawkins congressional hearings, and documents that the use of non-traditional monetary policy instruments at the effective lower bound (ELB) led to increased political criticism that predicts legislative actions threatening central bank independence. A model is developed in which the probability of the monetary authority’s future loss of independence is increasing in the use of non-traditional instruments, leading to attenuated monetary responses and higher inflation volatility. The attenuation can be mitigated under an institutional framework with clearly defined targets where the central bank is evaluated by how efficiently it achieves its goals.

Summary based on a working paper version, AI-assisted and human-reviewed. See the linked published article for the authoritative version.

In depth

Q1. What is the new measure of political pressure and what does it capture?

The paper constructs a measure of political pressure on the Federal Reserve by analyzing the evolution of critical questions and statements directed at Fed Chairs during semi-annual Humphrey-Hawkins Act testimonies to Congress, and finds that the number of critical statements specifically referencing non-traditional instruments increased significantly following the 2008 financial crisis. The measure tracks not only the volume of criticism but also its content—distinguishing criticism that specifically references the ELB tools from general discontent associated with low interest rate environments—allowing the paper to isolate the effect of unconventional policy use from other factors associated with the ELB subsample.

Q2. What is the empirical link between political criticism and legislative threats?

Following Hess and Shelton (2016), the paper analyzes bills introduced to Congress that threaten the powers of the Federal Reserve, and finds that the new measure of congressional criticism correlates highly with the introduction of such threatening legislation; moreover, the number of threatening bills specifically mentioning unconventional monetary policy is predicted by the amount of criticism referencing new policy tools. This provides an empirical chain from the use of non-traditional tools to political blowback to concrete legislative risk to Fed independence, motivating the theoretical model.

Q3. How does the threat to independence affect monetary policy in the model?

In the model, when the probability of future loss of independence is increasing in the use of non-traditional instruments, the optimal monetary authority chooses attenuated responses—using non-traditional tools less aggressively than the unconstrained inflation-minimizing policy would prescribe—thereby generating higher inflation volatility as a consequence of the political risk. The model captures the democratic reality that a central bank’s independence is inherently revocable by the legislature; a central bank that interprets congressional criticism as a credible signal of independence risk will internalize this constraint in its policy decisions.

Q4. How can institutional design mitigate the attenuation?

An institutional framework with clearly defined targets where the central bank is evaluated by how efficiently it achieves its goals—rather than by discretionary judgments about the appropriateness of its tools—mitigates the attenuation of monetary responses by narrowing the scope for politically motivated criticism of non-traditional instruments. If critics must evaluate the central bank against transparent targets, they face a higher evidentiary bar for threatening its independence when non-traditional tools are being used to meet those targets; this reduces the political risk of using such tools and restores the unconstrained optimal policy.

Key concepts

Humphrey-Hawkins testimony measure : the paper’s text-based measure of political pressure on the Fed, constructed from the volume and content of critical questions and statements directed at Fed Chairs during semi-annual congressional testimonies; found to predict threatening legislative actions. attenuation of monetary responses : the reduction in the aggressiveness of non-traditional monetary policy use relative to the unconstrained optimal policy, arising from the central bank’s internalization of the political risk of independence loss associated with using non-traditional instruments. clearly defined institutional targets : an institutional framework in which the central bank’s mandate is operationalized as specific measurable targets and the bank is evaluated by its efficiency in achieving them; shown here to mitigate the political risk of non-traditional instruments and restore optimal monetary responses.

Political Pressure on the Fed

Mon, 01 Jan 0001 00:00:00 +0000

This paper combines a hand-collected archival data set of over 800 personal interactions between U.S. Presidents and Federal Reserve officials from 1933 to 2016 with a narrative structural VAR to identify shocks to political pressure on the Fed and quantify their macroeconomic effects. The identification strategy exploits the well-documented Nixon-Burns episode of 1971—corroborated by Nixon Tapes recordings and Burns’s personal diary—as a narrative restriction that the spike in personal interactions that year was driven primarily by a political pressure shock rather than by economic conditions. Political pressure shocks are found to (i) increase inflation strongly and persistently, (ii) lead to statistically weak negative effects on activity, (iii) contribute to inflationary episodes outside the Nixon era, and (iv) transmit differently from standard expansionary monetary policy shocks because political pressure can be publicly observed, generating a stronger direct effect on inflation expectations. Quantitatively, increasing political pressure by half as much as Nixon, sustained for six months, is estimated to raise the price level by more than 8%.

Summary of a forthcoming paper, AI-assisted and human-reviewed. See the linked original for the authoritative claims and full conditions.

In depth

Q1. What is the narrative identification strategy and how is the Nixon-Burns episode exploited?

The identification strategy imposes that the spike in President-Fed personal interactions in 1971 is mainly driven by a political pressure shock, exploiting the well-documented fact that Nixon pressured Burns to ease monetary policy in the run-up to his 1972 re-election. Recordings from the “Nixon Tapes” and Burns’s personal diary corroborate this interpretation: Burns wrote that “the President will do anything to be reelected” and that Nixon urged him to “start expanding the money supply.” Romer and Romer (2004) estimated large easing shocks to monetary policy prior to Nixon’s re-election, contrasting with a large systematic tightening after it, further supporting that Burns eased in response to the pressure. Narrative evidence from Johnson’s pressure in the 1960s is additionally used to strengthen the identification.

Q2. What does the new data on President-Fed personal interactions show?

The paper hand-collects over 800 personal interactions between U.S. Presidents and Fed officials from the historical daily schedules made available by the Presidential Libraries from Franklin D. Roosevelt (1933) through Barack Obama (2016). The average interaction lasts 53 minutes; 36% are one-on-one; 11% occur on weekends; 16% are in social settings such as dinners; 92% involve the Fed Chair and 8% other Fed officials. There is large variation across administrations: President Nixon interacted with Fed officials 160 times, while only 6 interactions occurred under Clinton. These interactions arise endogenously in response to economic conditions, which is why narrative identification is needed to isolate the political pressure component.

Q3. What are the estimated macroeconomic effects of political pressure shocks?

Political pressure shocks are found to increase inflation strongly and persistently, to have statistically weak negative effects on activity, and a pressure shock half as large as Nixon’s sustained over six months is estimated to raise the price level by more than 8%. The weak activity effect distinguishes these shocks from standard demand expansions; the mechanism operates more through expectations channels than through aggregate demand, consistent with the public observability of political pressure on the central bank. The evidence also suggests political pressure shocks contributed to inflationary episodes in periods beyond the Nixon era.

Q4. Why do political pressure shocks transmit differently from conventional monetary policy easing shocks?

Political pressure shocks transmit differently from standard expansionary monetary policy shocks primarily because political pressure on the Fed can be publicly observed, which generates a stronger direct effect on inflation expectations than a private Fed decision to ease. The paper finds a stronger effect of political pressure shocks on inflation expectations relative to the activity effect, consistent with this channel: when the public observes that the President is pressuring the central bank, expected inflation rises even before the Fed acts on that pressure.

Key concepts

President-Fed personal interactions : face-to-face or telephone contacts between U.S. Presidents and Federal Reserve officials recorded in historical presidential daily schedules 1933–2016; used as a noisy observable proxy for political attention to the Fed, from which a political pressure shock series is extracted via narrative restrictions.

political pressure shock : an exogenous, structurally identified shock to the intensity of political influence on Fed policy, isolated using a narrative SVAR restriction that the 1971 Nixon-Burns spike in interactions was driven by political pressure rather than economic conditions.

narrative identification : an approach that imposes sign or zero restrictions on a structural VAR at specific historical episodes known from external archival evidence to be driven predominantly by a particular structural shock; here used to exploit the Nixon-Burns and Johnson-Fed pressure episodes.