36 Pages Posted: 25 Oct 2012

Date Written: October 24, 2012

Abstract

Independent central banks are thought to be effective inflation hawks because they are run by technocrats with conservative monetary policy preferences. But central bankers can only protect their independence by compromising with the elected officials who grant them their independence. Policy, therefore, is likely to be a weighted average of the preferences of the central bank and the government. Consequently, central bankers may be eager to help right-wing governments stay in power and oppose the election of left-wing governments. We show evidence from the United States that interest rates (a) decline as elections approach when Republicans control the White House, but rise when Democrats do; and (b) are sensitive to the inflation rate (output gap) when Democrats (Republicans) are in the White House. Thus, the Federal Reserve is a conditional inflation hawk. Since the Fed became operationally independent in 1951, the Republicans have exhibited a decided electoral advantage in presidential politics.