Does the Fed Try to Influence Elections?

by Will on August 23, 2010

There’s apparently a new study (PDF) out which looks at the question in detail, and concludes: Yes. Evidently the central bank has a measurable tendency to depart from trend policy going into elections.

That sounds right to me. I am of the opinion that Chairman Greenspan’s behavior in 2004 had something to do with a desire to get Bush reelected, and the housing bubble dovetailed well with all of that “ownership society” talk that Bush liked to do — there were political reasons for believing that those price increases were real and sustainable. On the other hand, Greenspan continued behaving badly in 2005, an election-free year, so maybe I’m overstating the case.
Obviously this is another of many reasons to be gloomy about our country’s governance. But it also suggests a question: what can we do about this? What are institutions that would remove central bankers’ perverse incentives here? One answer is that by publicizing the fact that Fed election-meddling is common, we could perhaps convince people to apply more scrutiny to Fed behavior during elections. But surely it would also be possible to fix this by changing the selection process for Fed officials. Any ideas?

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