The determinants of Federal Reserve policy actions: A re-examination

In an earlier article (Journal of Macroeconomics 19, 1997) we presented estimates of Federal Reserve reaction functions including variables representing economic and political influences. Our goal was to examine the relative importance of political versus economic influences in determining Federal Reserve actions, as well as to see which economic state variables influenced Federal Reserve actions during various time periods. This paper extends our earlier work in three ways. First, we re-estimate the monetary policy reaction functions in our earlier study in a way which obviates possible reverse causation problems and better approximates the information set that was available to the Open Market Committee at the time its decisions were made. Second, we now have five more years of data which allows us to examine the Greenspan years more fully. Third, we divide our sample period, 1965-94, into two sub-periods, pre-1979 and post-1979, to examine the view that the Federal Reserve evidenced greater concern for inflation in the latter sub-period. The essential change from our earlier study is to use the interval between FOMC meetings as our observation rather than a calendar month. This change is shown to have significant effects on the estimated importance of political factors and economic state variables as determinants of Federal Reserve actions. (C) 2002 Elsevier Science Inc. All rights reserved.